Analysis: The Economics of Wreckage, Part One

This is the first of a three-part series on macroeconomic financial effects of the Presidency of George W. Bush. On Tuesday, February 27, 2007, stock markets around the world dropped precipitously, led into the vortex by China, where the Shanghai Stock Exchange lost almost nine percent of its value. Major stock indices in the U.S. followed suit, wiping out recent gains that had brought forth breathless praise from the mainstream media about near-record highs that were nothing more than a brief, illusory departure from the pattern of abysmal real returns that common stock portfolios have offered investors over the past six years.

This first part of the series is the latest in a continuing program of index portfolio analyses that have been an on-going project here at The Dark Wraith Forums. Readers who have followed previous installments may recall that negative or miserably weak positive returns on equity index investments have been the typical outcome of these calculations in the past. Only in the last installment, published just after the sixth anniversary of President Bush's inauguration in 2001, did even one of the major indices, the Dow Jones Industrial Average, register a barely positive annualized real rate of return over the six years, and the decline in that and the other U.S. indices served to bring all three of the averages surveyed here back into line with the overall negative performance they have displayed over the tenure of the Bush Administration.

This first part, then, is a reminder to all who would offer even a modicum of praise for the Bush Administration's record as the steward of the American economy. Financial markets do not lie. They do not fabricate numbers, nor do they manipulate quantitative outcomes to suit the public relations purposes of the neo-conservatives; instead, the inflation-adjusted returns on investment in the three major stock indices of the United States calculated and presented below deliver the stark, objective assessment generated from trillions and trillions of trades involving nearly incomprehensible amounts of money: the Bush Administration has been an engine of financial depletion of the value of claims on ownership in American companies publicly listed by the three largest, most comprehensive stock indices.

The second part of this series will provide a standard, relatively simple macroeconomic model of the distribution of spending that comprises the total national income of a country, and that model will be applied to explain the way in which the United States government has financed hundreds of billions of dollars in deficit spending through the use of its trade deficits, particularly those it has run with China, which has for years deliberately manipulated the exchange rate of its currency, the yuan, with the U.S. dollar to the end of causing American greenbacks to flow to the central bank of China, which then used those dollars to finance the staggering budget deficits the Republicans have created year after year.

The third part of the series will review the dynamics by which the U.S. trade deficits with China have fostered the conditions the Bush Administration exploited to maintain abnormally low tax rates concomitantly with profligate spending, particularly on wars of opportunity. That third installment will conclude with the explanation of why the Shanghai stock market necessarily had to crash and what will be the likely consequences of recent economic events on the long-term prospects of a United States weakened by the irresponsible incompetence of the Bush Administration and its Republican cohorts who, until just recently, served as the exclusive, if unworthy, stewards of a nation that could have been far better off than it will be as the incontrovertible result of their time in power.

Responsibility Assigned
George W. Bush became the 43rd President of the United States on January 20, 2001. Until January 4, 2007, when the Democrats took control of both the U.S. House of Representatives and the Senate, the Republicans had controlled both the Executive and Legislative branches of the federal government, save for a brief period in mid- to late-2001 when a Republican-turned-Independent caused an even split in the Senate. Over the past six years, then, the financial house of this country has been in the virtually uninterrupted hands of the GOP, during which time the federal government went from running growing budget surpluses in the last years of the Clinton Administration to bleeding hundreds of billions of dollars in red ink every year under President George W. Bush and his congressional allies.

The Republican Party, through its legislators in Congress and its President in the White House, has overseen the abysmal performance of the U.S. stock markets, which represent the overwhelming bulk of the value of all public ownership of American corporations. It is in the stocks traded on these exchanges that much of the wealth of the nation is invested by everything from huge pension and mutual funds to individual speculators.

The GOP has no one but its own elected representatives to blame, notwithstanding any possible obfuscation by its elected representatives or their apologists in the mainstream media or among the tap-dancing ranks of the Right-wing punditry brigade. Republican economics has been a failure: it is based upon budget deficit-driven fiscal stimulus financed by trade deficits that have had the effect of causing the sell-off of the American capital base, which America's trading partners have then lent back to the United States government to finance its budget shortfalls. The irresponsible policy pursued by Mr. Bush, the Republicans in Congress, and their neo-conservative pseudo-intellectual backers is a twist on Keynesian economic policy prescriptions, but true Keynesians would never have abided fiscal health-draining deficits for more than a short period of time, and they never would have even so much as suggested hocking the American economy to an enormous, mercantilist-Communist country that has cynically, systematically distorted exchange rates to draw American dollars and jobs from America's shores.

Index Portfolio Performance during the Bush Administration to Date
As of (and including) Friday, March 2, 2007, George W. Bush had been President of the United States 2,233 days. As pointed out above, responsibility for the huge federal budget deficits year after year that have hallmarked the rule of the Republicans rests squarely with their party, its legislators in Congress, and the policy-makers in the White House, including George W. Bush, himself. Similarly, the Republicans have no one but themselves to blame for what is shown below to have been an unconscionable erosion of the purchasing power of dollars invested in the three largest U.S. stock indices over the six years that George W. Bush has been President of the United States.

From the first day of trading, January 22, 2001, after President Bush became the 43rd President of the United States, until the last trading day, March 2, 2007, before the publication date of this article, the performance of the major stock markets—measured by the index portfolios of the Dow Jones Industrial Average, the Standard & Poor's 500, and the NASDAQ Composite—has been abysmal: all three indices have delivered negative real returns on investment over the term of the past six years.

January 22, 2001, was the first day of trading after Mr. Bush became President. The three major stock market indices stood at the following levels at the close of trading on that day:

January 22, 2001, Index Closing Values

Dow Jones Industrial Average	10,578.24
Standard & Poor's 500	1,342.90
NASDAQ Composite	2,757.91

At the close of trading on Friday, March 2, 2007, these same three averages stood at the following levels:

March 2, 2007, Index Closing Values

Dow Jones Industrial Average	12,114.10
Standard & Poor's 500	1,387.17
NASDAQ Composite	2,368.00

If an investor were to have formed a portfolio based upon each of these three indices and managed each portfolio in terms of composition and balance to mirror the relevant index, the investor would have earned the following total nominal returns on investment over the 2,233 days from January 22, 2001, to March 2, 2007:

Total Nominal Portfolio Returns from 1/22/2001 to 3/2/2007

Dow Jones Industrial Average	14.52%
Standard & Poor's 500	3.30%
NASDAQ Composite	-14.14%

Expressing these returns on an annualized (that is, "percentage return per year compounded") basis, the nominal results just presented are as follows:

Annualized Nominal Portfolio Returns from 1/22/2001 to 3/2/2007

Dow Jones Industrial Average	2.24%
Standard & Poor's 500	0.53%
NASDAQ Composite	-2.46%

The above are nominal (that is, "not corrected for inflation") results. Taking into account the erosion of purchasing power (that is, "the effect of inflation") on portfolio values over the holding period requires adjusting each of the current values to its equivalent purchasing power value on January 22, 2001. From the Bureau of Labor Statistics Consumer Price Index data for January 2001, the CPI stood at 175.1, and for January 2007, the CPI stood at 202.4. The February 2007 figure can be estimated by various methods, and here, a conservative projection of 202.76 is derived from the three-month moving average of the CPI, implying an annualized inflation rate for the February of 2.2 percent, based upon the average of the annualized inflation rates for the previous three months.

Expressing the closing index portfolio values as of Friday, March 2, 2007, in terms of their January 2001 purchasing power equivalents provides the following results:

March 2, 2007, Index Values in January 2001 Purchasing Power Value

Dow Jones Industrial Average	10,461.55
Standard & Poor's 500	1,197.94
NASDAQ Composite	2,044.97

The total real return on investment for each portfolio is then the quotient of the January 2001 index value when divided into the adjusted March 2, 2007, value:

Total Real Portfolio Returns from 1/22/2001 to 3/2/2007

Dow Jones Industrial Average	-1.10%
Standard & Poor's 500	-10.79%
NASDAQ Composite	-25.85%

Finally, expressing these real returns on an annualized (that is, "percentage return per year compounded") basis, the total real return results just presented are as follows:

Annualized Real Portfolio Returns from January 22, 2001, to March 2, 2007

Dow Jones Industrial Average	-0.18%
Standard & Poor's 500	-1.85%
NASDAQ Composite	-4.78%

The total and annualized real returns to the selected portfolios are presented below in graphical form:




As is plainly evident, real returns on investment in three large U.S. stock indices, representing as they do the majority of ownership value in publicly traded U.S. corporations, have been negative. Investing in even the very largest, presumably safest public corporations would have led to an actual loss of money in real terms, and that loss would have been worse by investing in smaller-cap public companies through the NASDAQ Composite.

In practical terms, the numbers above mean this: an investor putting $100 on January 20, 2001, into a portfolio of the Dow Jones 30 Industrials and maintaining the index balance until March 2, 2007, would now have the purchasing power of $98.90; an investor doing the same but investing in the Standard & Poor's 500 would now have the purchasing power of $89.21; and an investor doing the same but investing in the NASDAQ Composite index would now have the purchasing power of $74.15.

Investing in stocks, particularly in well-balanced portfolios, is supposed to create capital appreciation in real terms over a long period of holding time; instead, over the course of the Bush Administration, investments in well-balanced, standard index portfolios have resulted in real purchasing power erosion of dollars invested.

This is objective evidence, accumulating over more than six years, of fiscal mismanagement on a scale that will be felt for generations to come. This, then, is objective evidence of a degraded future for the United States, whose citizens will labor mightily under the after-effects of economic degradation caused by men and women in Washington who posed as prudent, fiscal conservatives, but instead acted in a more economically reckless manner than any American leadership in decades.

This series will continue in the next installment with a survey of the national income allocation model, which will be used to explain the way in which the Republicans propelled the economy far too long on funds borrowed from overseas investors who got their money to make the loans by bleeding the American economy of both its greenbacks and its jobs.


The Dark Wraith trusts that readers will stay tuned.