Like many of you I also during the holiday break had varying conversations on a wide range of topics with either family members or friends. One topic that came up many times was where the stock market would end up by year-end. People gave their differing opinions for both higher and lower guesses. However, what seemed to be missing from any of the discussions was whether the rise was valid or not. In other words, just why was the market at these levels to begin with?
It seemed as if everyone intuitively knew the reason yet, because they knew, they didn’t want to say it. Everyone was happy about their now increased 401k balances but, (and it’s a very big but) they seemed to feel very insecure on discussing anything in greater detail in much the same manner someone who inherited great wealth feels uncomfortable talking to someone who earned theirs.
It seems for lack of a better way to express it. People understood deep down that they could claim no acumen in their stock picking. They just invested in the main indexes and have let it ride. And thanks to the Federal Reserve (Fed.) handing free money to the banks to use, the market has not only gone up, it’s rocketed to heights never before seen in the history of financial markets.
So not to beat a dead horse on such a subject (both you and many others know or have read my dissertations on this very topic) I just couldn’t help myself from interjecting into one conversation where it seemed the amounts of money being discussed represented only numbers such as zeros and decimal points. i.e., “Well the Fed. is pumping in $85 Billion now. They’ll probably cut back to $80 or $75 in the coming months. It’s really not that much of a cut back, it shouldn’t have much of an impact blah, blah, blah.”
Being both a business person and entrepreneur I was taken back on the casualness of the numbers. It’s as if Billions is just loose change. To talk real money we have to now talk Trillions. So as I usually do I added my two cents into the conversation to give some perspective of the difference that’s taking place currently and, what it would take to equal just the dollar value being pumped into the markets. And why this type of intervention in the markets is so perilous.
The main driver is: There’s no real economic underpinning such as job creation, goods and services free-flowing, or market expansions from a GDP expansion. No, what is taking place currently is with all this money pumping, the GDP and other economic benchmarks are contracting. Even Wall Street itself is contracting. And they are the ones getting the money!
So here’s a quick example I used to give perspective. This is not – I repeat – not an endorsement of what I believe we should be spending our money on. It’s just an analogy so one could wrap their heads around the differing circumstances. For if we are talking BIG numbers, you’re going to need BIG things to represent them.
Just talk about military spending and you will get people lining up as if they themselves are going to battle. One side will say we need less spending, the other will say we need more. Again, both sides will be passionate on their beliefs. Many of the reasoning’s will be sound, both for and against. “We need this or, we need that!” Butted against the opposing, “We need to reduce or eliminate this or that!”
All the arguments for or against will be buttressed around the argument of money. One way or another. And that’s a fair point however, let’s put a little perspective here as to get everyone on the same page when it comes to exactly how much money the Federal Reserve is printing and pushing into the financial markets with little to nothing more than an inflated asset class along with no economic activity to support it.
Bring up the subject whether they should or shouldn’t stop or taper and people seem to have no problem with spending or printing the $85 Billion month after month if that’s what it takes. Regardless if they understand what $85 Billion represents or not in any other form. It’s a fools way to look at it in my opinion. So here’s some perspective using items procured through the military.
If the Federal Reserve only cut their quantitative easing (QE) this month from $85 Billion to say $75 Billion. That cut would represent approximately the equivalent of building – FIVE – B2 Stealth Bombers. That’s per month. And that’s the reduction! Currently the Fed. is printing and pushing money into the markets as if we ordered (wait for it….) FORTY TWO brand spanking new B-2 Stealth Bombers – per month!
Let’s not forget Congress cut the building of the B-2 at a little over 25 planes down from the original 100 or so first envisioned because of costs. The Fed. today injects into the markets monthly the monetary equivalent to purchase double the existing force again – every month.
Want a better representation? In just 1 year, again just one year, the Federal Reserve has pumped enough money into the markets to have purchased, (Again, wait for it...) FIVE HUNDRED and TEN new B2′s. Remember – we now have somewhere in the mid 20′s. (I used 2 billion for each plane since that’s in line where they were when first ordered, however at that pace would a discount be in order? Just sayin’)
So again to make it clear – that’s just one year in planes. What would it be if we used say the most expensive and technological marvels on the planet? The Nimitz Class Nuclear Powered Aircraft Carrier.
Currently they have an approximate price tag of around $13 to $14 Billion dollars each. Based on the above math QE pumps into the markets the equivalent of purchasing SIX brand new state of the art Nimitz Class Aircraft Carriers – per month!
In just one year the same amount of QE dollars would purchase SEVENTY TWO. Again for a little perspective our current navy stands at around 19 commissioned ships. That’s both old as well as new combined. Once again in just one year, we could replace and expand our entire aircraft carrier fleet with the newest and greatest available nearly 4 times over.
Let’s just throw one more technological marvel in for the fun of it. One of my absolute favorite marvels the world has created. The submarine. Using today’s most advanced example aka “Boomers” or Ohio class. You could build approximately TEN per month at the pace the Fed. is injecting money.
At only $6 to $8 billion a piece that means in one year you could build nearly One Hundred and Twenty brand spanking new technological marvels. Again – in just one year. I believe that would replace all existing vessels also by multiple folds.
Now let me reiterate what I just outlined here again as to get some perspective on not only the dollar amounts but, what those dollar amounts truly entail.
In just 3 years the Federal Reserve has pushed into the financial markets via the QE programs the equivalent in dollar amounts to have purchased 510 B-2 Stealth Bombers, 72 Nimitz Class Air Craft Carriers, 120 Ohio Class Submarines. and I still have nearly 2 more years of money to appropriate. i.e., Two TRILLION is still in my pocket left to spend. QE and its equivalents are now nearing 5 years.
I still have plenty left to buy the aircraft, to man them or, the missiles to outfit them. Heck, that’s just if I stop here. So far there is no indication the Fed. is going to stop and there’s also talk that the new Chairperson might be inclined to spend more!
Maybe we should add a few M1 Abrams tanks just for the fun of it. They’re about $7 Million a piece so we can get Oh let’s say TWELVE THOUSAND a month. Yes that’s 12,000 per month or One Hundred Forty Four Thousand (let that number sink in – 144,000) in a year. Sounds like a bargain when I state it that way doesn’t it? And I would still have a Trillion left if they stopped printing today.
But here’s the real crux of this argument and why I stated it as such. Sure it’s a little hyperbole and the math is not exact. We would never do now nor would anyone ever approve of such a plan. However, think of where GDP and the economic output as to where it would be today as to employ the talent needed to build those marvels. The engineers, the skilled labor, the steel, the copper, the mechanized equipment, the hotels, restaurants, and more to feed those that just supply the day labor, never mind the industrial backbone of supply that would be needed and more.
If one thinks there is a spin-off in trickle up or down money in housing or cars – just think about the economic impact building one of these marvels entails. At the above run rate you probably couldn’t have an unemployment issue. The impact would be far too great across far too many industries. Yet…
The best the Fed. can now show for all it’s pushing of free money into the financial markets is ball of string it can’t even get the cat to play with. And that’s why all of this is so dangerous to everyone in the end. Because even the cat knows chasing this piece of string is a fool’s errand.
What is indisputable is what would be taking place in this economy in terms of real sustainable growth if that same equivalent of money was transpiring because of real economic principles.
The only thing transpiring currently is “free money” is now flowing into bank coffers and buying up risky assets while having adverse effects as to the velocity of money. All while seeming to be leading us into further and further out into more treacherous waters.
All without the ships and planes to rescue us when we’ll need them most.
© 2013 Mark St.Cyr