The stock exchange seems to be making new all time highs daily. Instead of congratulating yourself for what a trading guru you are, it may be time to think about the Federal Reserve’s extreme rate policy
The financial catastrophe of 2008 relieved the global banking system of around one trillion U.S. dollars. Therefore, in an effort to recapitalize itself, the world wide banking system has to make around 1 trillion US dollars.
Regrettably, recapitalization doesn’t come cheap. The Fed is utilzing artificially low rates near zero to bridge the gap. Recent predictions say we’ve made up $300 to $400 billiion, but that still makes us over $500 billion short.
The remaining $500 billion will be much more challenging for the banks to recapitalize because of the new rules and regulations. While the Volker rule and Dodd/Frank were put together with the best of intentions, as so many laws and rules and regulations are, the real effect of these new rules and regulations will be on the bank’s bottom lines.
At their core, the Volker rule and Dodd/Frank obstruct the breadth of bank’s business opportunities. In barring their business possibilities, these regulations limit their ability to completely recapitalize the banking system. Consequently the Federal Reserve will be required to preserve its near zero interest rate policy past current predictions in order to drive the system to recapitalization.
Now lets discuss the existing U.S. government debt issue. The current U.S. deficit is now over 16.5 Trillion and growing every second. Despite the fiscal cliff being avoided and the sequester, the U.S. government continues to operate in the red for Fiscal year 2013 by an projected $800 billion. The CBO has comparable predicted deficit estimates for fiscal years 2014-16. These deficits will take our national debt to at least the 20 Trillion dollar level. TWENTY TRILLION DOLLARS!
Someday in the near future, the United States government will minimally need to balance the annual budget deficits in order to stop the total debt expansion, as well as make a true concerted effort to bring down the total national deficit in an effort to balance itself. This suggests the US will need to take $500 to $800 billion of government spending from the U.S. economy. This spending hole is going to lead to numerous quarters of negative growth. This is without doubt not great for the U.S. stock markets or the global stock markets for that matter.
Our only saving grace is that maybe the U.S. economy will grow its way out of this dangerous debt obsession. Regrettably, this is largely a pipe dream. The Federal Reserve will undoubtedly be forced to keep interest rates at cheaper levels to help keep the U.S. economy from struggling with the reality of recession.
While the stock market is trading close to all time highs, the Federal Reserve must persist its near zero interest rate policy to recapitalize the World Banking system and to support the financial system as spending cuts and tax hikes eliminate money from the economy to help stem the threat of another recession.