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.
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. 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 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 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 |
| NASDAQ Composite | 2,757.91 |
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 |
| NASDAQ Composite | 2,273.9 |
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% |
| NASDAQ Composite | -17.55% |
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% |
| NASDAQ Composite | -2.49% |
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 |
| NASDAQ Composite | 1,807.26 |
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% |
| NASDAQ Composite | -34.47% |
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% |
| NASDAQ Composite | -5.37% |
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.
Comments
Wrote Minstrel Boy:
Wrote trog69:
Damn. Good luck to you sir. Good luck to all of us.
Wrote rm hitchens:
Question: if the Iraq War is costing some hundreds of billions each year, would a (wise) decision not to invade in 2002 have left us with nonexistent or very small budget deficits?
Wrote Weaseldog:
To add to your previously posted links DW, I embedded Dr. Albert A. Bartlett's lecture 'Arithmetic, Population and Energy', on my blog at the address below.
http://weaseldog.blogspot.com/2008/09/arithmetic-population-and-energy.html
It gives us a physical view of the crisis that shouldn;t be forgotten when the media is attempting to frame it as a purely economic crisis.
It is my view that our financial sector has grown far beyond the limits of what the physical world can provide in terms of real physical wealth. The monies sloshing through the financial system has a value that exceeds many times over, the value of the entire planet Earth.
The natural order of things, tells us that our monetary system is nothing but a giant leaking bubble, like one of those blow up gorillas we see in front of used car lots. And like those monstrosities, if the air is cut off, they collapse into an empty mass of fabric, conforming to the outline of objects they cover.
Except our monetary system grows. So we must not only provide a constant influx of new air to keep it propped up, we must keep getting bigger and bigger blowers to inject ever increasing quantities of air into the bubble.
If we follow the car lot analogy, eventually the dealership must buy such a large fan to blow the air, that the cost of powering it, exceeds all the other costs incurred to operate the car lot. Yet, the gorilla must stay inflated...
And so we're looking now at the designs for Paulson's newest bubble monstrosity. This bubble will cost many times more per year, than the government's currently bloated yearly deficit.
This bubble will grow and it will try to deflate, so it will need to be rescued again. And as it grows larger, the period between rescues will shorten.
And Paulson wants complete access to essentially unlimited funds to power these bubbles. Worse, he's even told us that his plan is to blow another bubble. He's not even being secretive about it.
Paulson is chasing the dragon. The cash infusions must grow ever larger to prevent meltdown. Today it's in the $billions, tomorrow the $trillions, in a few days it will take $quadrillions. And still the scale of the crisis will continue to increase.
The interest fees needed to cover the mounting debts, exceeds the productivity of out finite planet. The debt now has taken on it's own life as a hyperinflating entity, no longer constrained by the forces of nature. It must expand ever faster, or perish.
This weekend, I plan to buy new handles for one of my wheelbarrows. I'm going to need both to carry cash to the store to buy milk. Assuming I'm not trading home grown cucumbers for goats milk from a neighbor.
Wrote konagod:
Good Evening, Dark Wraith,
Lord have mercy. I have been chomping at the bit for some of your insights into the goings on (or goings off) in the USA lately and I seem to have hit the motherlode.
Unfortunately, I tend to best absorb knowledge in the early morning rather than late afternoon. (I absorb tequila in the late afternoon.) So, in the words of the governor of California, "I'll be back."
Wrote konagod:
Apparently the Dark Wraith went out for dinner.
:lol:
Wrote Dark Wraith:
The Dark Wraith went to the fridge for dinner.
Wrote trog69:
Pretty good one, Weaseldog. I've just finished a short article at FT that talks about the 'deflation' of the "shadow banking system", that was similar to your analogy.
Wrote Weaseldog:
Thanks for visiting my Site Trog69.
Our current situation was completely predictable. I figured it out in 1999 when I started trying to understand what peak oil would mean to our economic system.
Our economic crisis already oscillated every time there was a shortage of oil supplies. you can see the ripples in various economic graphs, like someone plucking on a string.
The natural order if a fiat monetary system in a no growth environment is to cycle between boom and bust. The wave length is dependant on a number of factors. The one most easily controlled is the interest rate. The lower the interest rate, the shorter the wavelength, the faster the frequency and the more extreme the peaks.
In an environment of resource growth, the wavelength of the oscillations increase. As monetary growth is partially offset by industrial growth.
So in this view, when oil production goes flat, we should immediately see a return of a short period boom and bust cycles. Raising interest rates will lengthen the cycles and bring stability. Lowering interest rates will shorten the cycle and increase frequency of bubble creation and busts.
Every effort by our financial leadership, seems designed to increase the frequency and amplitude of the boom and bust cycle. I don't know if this is intentional or not. I believe Paulson, Bernanke and even Greenspan don't really understand the fundamentals of the system that they've been trying to manipulate. I know they are more intimately with the internals of the system than I am. i think though that it is clear that they don't see how it all functions together and interacts with the physical world.
So they use complicated theories, based on self referential logic to make decisions that are the opposite of what many of us would do in their place.
Or maybe they aren't even smart enough to outsmart themselves, and are just bumbling around trying to make a quick buck?
In a few short years, world oil production will begin to decline. When it does, the bubbles won't be peaks, but ledges. They'll break harder, faster and fall further.
If we can't prepare for this eventuality now, then we won't handle the decline any better.
Wrote Weaseldog:
DW, grab me a Shiner Bock on your way back please.
Wrote trog69:
I wonder if 1) we'll ever learn the true prices of the assets we've all just bought, and 2) will there ever be a true accounting that gives back the difference to the coffers, or are we expected to finance the next round of vacation homes for the bankers?
Wrote Minstrel Boy:
there is a big difference in the type of bubble though. real estate booms and busts are much closer to basketballs. they don't pop so much as soften. things happen much slower in that market. it isn't until somebody goes into a crossover dribble, but the ball stays on the floor that things get noticed. even then, it's more repairable.
the bush economic policy remains much the same:
wall street suited motherfuckers: hey, we need to be deregulated so that we can give cheap ass loans to all our buddies.
bush: Okie Dokie Smokey
WSSMFers: hey, dude, our buddies aren't going to pay us back.
bush: no problems, here's some more money.
Wrote Peter of Lone Tree:
Bill Heard Enterprises closes its doors:
Scottsdale, AZ., Sept. 24, 2008 - According to Automotive News' Chrissie Thompson, Bill Heard Enterprises, the country's top Chevrolet dealer group, is closing the doors at all of its 13 dealerships at the end of business today, according to a person with knowledge of the situation.
The company notified the stores' general managers at 2 p.m. today, the source said, who spoke anonymously because he was not authorized to speak.
High fuel prices, cancelled floorplanning from GMAC Financial Services, a reliance on trucks and SUVs, a soft national economy and struggles in local markets had troubled the company, which on Sept. 12 closed its store in Scottsdale, Ariz.
In the end, the company could not raise operating capital and could not finance its floorplan, the source said. Company officials have discussed closing the company since Friday, the source said.
Bill Heard Enterprises, of Columbus, Ga., ranks No. 13 on the Automotive News list of the top 125 U.S. dealership groups, with 2007 group revenue of $2.13 billion.
Wrote trog69:
Could one of you smart fellers help me out here? See, I get it on why Obama's minions have been sure to let me know that they have some of slick Willy's former economic masterminds on board, so we can relax, 'cause the good times are a'comin', and we'll be back in 1997 licketysplit. That's just cool beans, dudes y dudettes.
What I'm wondering is, what are these geniuses planning on using to prop things up, like the Internet whirlwind did for much of Clinton's terms? And while that started to unravel, Clinton did indeed push for more minority homebuyers by loosening the credit strings, so the economy stayed on a relatively even keel for the remainder of his watch.
What do they plan to use as an economic engine? Windmill manufacturing? Rooftop farming? I think we've got enough dams built, so I guess the bridges will be a good WPA start.
Wrote Peter of Lone Tree:
"What do they plan to use as an economic engine?"
A chicken in every pot?
Two cars in every garage?
Ain't sure that last is that good a stimulus though. As Will Rogers said quite some years ago: "We're the only country that ever went to the poorhouse in an automobile."
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Republicans, the party that wrecked America.
i've taken murderous hits, in a very conservative investment position.