President Obama and Vice President Biden continue to press Congress to pass the Obama administration's nearly $450 billion jobs bill.
What will happen to the market if it passes?
After a brief bounce in the market on the congratulatory claims that are sure to flow out of the White House - nothing.
In reality even in the unlikely event all that spending happens instantly it will have little or no impact - it is a drop in the bucket so small that it will not even offset the continued population growth let along generate the immediate four thousand billion ($4 trillion) of additional consumer and business spending needed to bring the economy back to "full employment."
In the real world only the Federal Reserve has the power to create new money and channel it to potential spenders. Typically it does it via the purchase of assets in the "open market." This puts money into the commercial banks, which the banks then loan to consumers and business. Business booms and hires more workers to produce the additional output. Welfare rolls decrease and tax collections rise.
In the past such an expansion of the banks' loanable funds has worked in minor recessions. But not this time for four reasons:
- we no longer have a minor recession - the economy has deteriorated so significantly that consumers are paying down their credit cards and consumer loans;
- the banks are under pressure to hold more liquidity as reserves instead of loaning it out; and
- business has so much excess capacity that it is unlikely to buy even more plant and equipment no matter how low the banks price the loans; and
- the interest rate structure is such because of the economic collapse that banks can loan money to the federal government and earn as much as they can earn from loans to consumers and businessees.
In other words the economy is severely depressed and today's Federal Reserve governors, appointed by the President and confirmed by the Senate, are stymied by the huge economic collapse their policies have wrought. As we shall see, qualified appointees would not be stymied.
The Fed's most recent "effort" to get the economy going involved interest rate swaps - selling some of its huge inventory of short-term federal notes and using the proceeds to buy long-term federal notes, thus bidding up the prices of the long-term federal notes and reducing their yields.
Under normal circumstances, lower yields on federal long-term debt might encourage banks to use more of their "long-term" money to make long-term loans to businesses and consumers and less to buy the long-term federal notes that now yield less.
The "swaps" been going on for a few days and long- term federal notes are yielding a bit less as the governors hoped, but nothing of significance is happening to consumer and business spending - business and consumers have not responded to the reduction of a few basis points on the cost of money.
Does that mean we need a bigger jobs bill and even more swaps? Absolutely not. Repeating something that has failed and expecting it to yield different results the next time around is a good definition of crazy or unworldliness.
So can anything be done? Yes, the economy and stock prices (and the federal deficit and the President's collapsing reelection chances) could be turned around in a matter of weeks - if the Federal Reserve channeled its on-going money creation directly to consumers instead of indirectly to the banks.
The Fed needs to create more and more money over time to meet the transactions demand of businesses and consumers in a growing economy. Normally it channels newly created money in via assets purchases such that the new money flows into the banks and is loaned out. But that only works when consumers and business are willing to borrow and spend more. Today they are not.
In contrast, consumers such as Social Security recipients have high propensities to consume. Newly created dollars entering the economy by going to them instead of to the commercial banks are likely to be spent.
Someday this president or the next will appoint Federal Reserve governors who understand macroeconomics and have real world experience in commercial banking and business. Then we are quite likely to see such a move to direct insertion of new money - if only because in today's real world severely depressed economic circumstances its the only thing that will work.
What should an investor do when the Fed changes gears and even floats the idea that it might begin creating money and putting it directly in circulation instead of indirectly via the banks?
Buy equities like there is no tomorrow because the market will quickly rise far above its historical highs. A Dow of 15,000 within 90 days of the announcement is my wet finger in the air best guess.
Until the economy recovers there will always be specific opportunities. But when the Fed announces the shift in the way it inserts new money from the banks to consumers everything will explode and we will have the greatest bull market in history!