Grace Ross: Market Jitters—Real Problems, Real Harm

Tuesday, June 25, 2013

Grace Ross, GoLocalWorcester MINDSETTER™

Early in 2008 I started walking the halls of the State House to address the foreclosure crisis that many of us had seen the beginnings of almost a year earlier. I had said then that the foreclosure crisis would bring down the world economy–not based on my own knowledge, but based on what I had learned about how mortgages were financed. Subprime mortgages were crashing and they had been financed across the world.

Speaking with our local senators, Senator Chandler and Representatives like my Rep at the time, Vincent Pedone who were deeply concerned about what was already beginning to harm our city, Worcester and other parts of the state. Worcester to this day remains one of the hardest hit cities in our Commonwealth.

At the time the stock market was behaving erratically even though it was bringing in some of the highest volume of trading ever. The ups and downs were extreme. A system that is destabilizing is erratic before it falls apart.

It is with concern that I’ve been watching the stock market over the last month or more.

In mid-June, Federal Reserve Chair Bernanke took the risky step of floating the balloon, the concept, that the Federal Reserve may no longer purchase $85 million worth of debt every month. It’s been doing this buying stocks and bonds up as a stimulus to the national economy. When the stock crashed in 2008, the standard stimulus type behavior of the Federal Reserve was lowering the interest rate. Since the crash the Federal Reserve has essentially kept interest rates down to zero. The Federal Reserve having used up most of its tools and the economy was not rebounding, the Federal Reserve decided to infuse money into the economy by buying debt.

The problem is that the Federal Reserve (The Fed) does essentially the same thing when it buys stocks and bonds as when you and I decide to put a new washing machine, let’s say, on our credit card. As soon as we make a commitment to pay, the debt enters into a ledger in a bank somewhere as money that has been promised. That value we promise to pay turns into a liquid monetary transaction in a ledger somewhere in a bank. The ledger entry becomes a digit in an electronic account; it brings into existence the money that we have promised to pay. We have promised that we have that money and that we would be paying it.

The Federal Reserve is doing the same thing. That $85 million of stocks and bonds it purchases is as if the Federal Reserve was printing money every month on the good faith and credit of the people of the US. It is putting that “money” into circulation in our country even though it is supposed to be Congress that decides when money is printed.

Overwhelmingly, Congress authorizes actual dollar bills getting printed these days mostly just to replace enough of what falls out of circulation every month to keep the same number of dollar bills in play. The Federal Reserve however is printing money by writing debt onto its books month after month after month.

The mere suggestion in mid-June that they might stop doing it at the rate that they’ve been doing it has led to an ongoing fall in the stock markets. Not just in the U.S., but elsewhere in the world.

What’s remarkable about this fall is that usually when the stock market shifts it’s money, it is moved from one type of investment to another. Conservative investments are usually purchased such as buying gold or silver or in the past, buying treasury bonds; US Treasury Bonds backed by the good faith and credit of the U.S. people has generally been enough to have folks trust them.

In the last month, now vastly accelerated by the announcement, every type of investment is being sold. Anybody maybe worried who understands that the present Fed’s behavior as the equivalent of printing money based on no new commodity, no new actual production line at a factory or anything of concrete value–that is printing money against nothing, against thin air.

Although the stock market seems to have been doing well and all the folks who lost money are now holding more US dollars than they had before, if the US dollars are not backed by anything real then it’s arguable that that money is worth little to nothing.

The response in the stock market to the Fed Chair’s announcement that the Federal Reserve might stop that infusion of money into the market every month has led to a selloff in every area–the kind of sell off that seems to reflect a fear in the market that there is no value; if the feds saying it will stop putting money in means that they don’t trust the value of anything that they’ve been purchasing.

Those of us on the ground know that our real lives are not getting any better. The fact that commodities have been losing value for months may be an expression that none of us have the money to buy a new refrigerator and a new car–the kind of commodity that we spend our big bucks on as regular people.

Watch the market.

One of the things that happened with this selloff is that interest rates suddenly jumped up. That change could be very damaging to those of us who right now actually need interest rates to be low; our incomes aren’t enough to make ends meet. We also actually need interest rates to be low so that our governments might choose to start investing again in neighborhoods and jobs and other important activities.

Even the recent state transportation bond bill passed with much feather fluffing and dust in the air. Now, even though the Governor signed the bond bill, he hasn’t agreed to spend even half it.

That borrowing money may get much more expensive suddenly is dangerous for those of us on the ground; we need a fixed road, bridge or water main (witness Fitchburg on top of last year’s Worcester water main); we need new jobs in our communities or repairs to houses and buildings.

Watch the market.

In the meantime, this author’s prediction is that the Fed Chair is going to go back to the policy of continuing to buy debt every month and for the foreseeable future. Still, if that’s all that stands between us and a major market crash – the Fed printing money in its own basement, we’ve got a lot more work to do to have a real economy that’s going to be healthy enough for all of us.

Grace Ross is a former Gubernatorial candidate and author of Main St. Smarts.