The Economics of Wreckage, Part One (Updated)
This revised first part of "The Economics of Wreckage" series, then, is a reminder to all who would offer even a modicum of praise for the Bush Administration's stewardship 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, social conservatives, and religious Right who have controlled the levers of administrative and regulatory power in the United States since the beginning of the 21st Century. 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 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 three parts of this series that will follow show other aspects of the macroeconomic problems caused by the Bush Administration. Basic principles of economics will be explained and then used to demonstrate that in one arena after another of economic policy, the seeds of the current economic crisis were being sown; more importantly, because warning signs were evident along the way, the debilitating combination of recession and inflation now unavoidable could have been averted if not for the imprudence, incompetence, and ideological blindness of the leaders in Washington.
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. For the first six years of the Bush Administration, then, the financial house of this country was 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. Since the Democrats took full control of the House of Representatives and nominal control of the Senate (by virtue of two Independents caucusing with them), little has changed: the government is projecting a federal budget deficit of $407 billion for the current fiscal year, and President Bush's recent request for $700 in spending authority to buy bad mortgage-based assets from financial institutions will cause future budget deficits of even greater magnitude.
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 investors.
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 neo-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 like China that has cynically, systematically distorted exchange rates to draw U.S. dollars and jobs from America's shores.
Index Portfolio Performance during the Bush Administration to Date
As of (and including) Friday, September 19, 2008, George W. Bush had been President of the United States 2,798 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 seven-and-a-half 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, September 19, 2008, before the publication date of the updated version of this article, the performance of the major stock marketsmeasured by the index portfolios of the Dow Jones Industrial Average, the Standard & Poor's 500, and the NASDAQ Compositehas been abysmal: all three indices have delivered negative real returns on investment over the term of the past seven-and-a-half 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:
|Dow Jones Industrial Average||10,578.24|
|Standard & Poor's 500||1,342.90|
At the close of trading on Friday, September 19, 2008, these same three averages stood at the following levels:
|Dow Jones Industrial Average||11,388.44|
|Standard & Poor's 500||1,255.08|
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 2,798 days from January 22, 2001, to September 19, 2008:
|Dow Jones Industrial Average||+7.66%|
|Standard & Poor's 500||-6.54%|
Expressing these returns on an annualized (that is, "percentage return per year compounded") basis, the nominal results just presented are as follows:
|Dow Jones Industrial Average||+0.97%|
|Standard & Poor's 500||-0.88%|
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 August 2008, the CPI stood at 219.1. The September 2008 CPI can be estimated by various methods; here, a conservative projection of 220.3 is derived from the average of the annualized inflation rates for the previous six months, which provides anannualized inflation rate figure for September 2008 of 6.9 percent.
Expressing the closing index portfolio values as of Friday, September 19, 2008, in terms of their January 2001 purchasing power equivalents provides the following results:
|Dow Jones Industrial Average||9,051.34|
|Standard & Poor's 500||997.52|
The total real return on investment for each portfolio is then the quotient of the January 2001 index value when divided into the adjusted September 19, 2008, value:
|Dow Jones Industrial Average||-14.43%|
|Standard & Poor's 500||-25.72%|
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:
|Dow Jones Industrial Average||-2.01%|
|Standard & Poor's 500||-3.81%|
The annualized and total 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 September 19, 2008, would now have the purchasing power of $85.57; an investor doing the same but investing in the Standard & Poor's 500 would now have the purchasing power of $74.28; and an investor doing the same but investing in the NASDAQ Composite index would now have the purchasing power of $65.53.
Investing in stocks, particularly in well-balanced portfolios, is supposed to create capital appreciation in real terms over a long holding period; 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 seven-and-a-half years, of fiscal mismanagement on a scale that will be felt for generations to come. This, then, foreshadows 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 pursued reckless economic policies that have resulted in actual purchasing power losses from long-term equity investments in well-balance, well-recognized portfolios.
This series will continue in the next installment with a survey of Keynesian economics in theory, application, and performance over the past half century. The model will be used to explain the way in which successive Presidents, both Republican and Democrat, used monetary policy to stimulate, and ultimately propel, the American economy, largely by virtue of the real return to labor remaining almost unchanged for decades. Inappropriate reliance upon monetary policy rather than disciplined fiscal policy ultimately led to several long cycles in which the United States central bank became involved in macroeconomic management rather than aggregate price stability, with disastrous results by the end of the 1970s and similar, if magnified, problems now unfolding for a new President to face.
The Dark Wraith trusts that readers now, near the end of the Bush Administration, are receptive to the story of what this Administration has done to the American economy, prudent investors, and the good workers of this country.
Wrote Minstrel Boy:
Wrote rm hitchens:
Wrote Dark Wraith:
Wrote Minstrel Boy:
Wrote Peter of Lone Tree:
Wrote Peter of Lone Tree:
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