Tipsheet

No, It's Not Raining; That's Democrat 'Trickle Down'

The truth is that there are structural problems with how our government operates. Baseline budgeting, the lack of single subject provisions in legislation, obscure rules in the House and the Senate and a tax code that's meant to achieve political and social ends rather than fiscal ends, have made us not just a slave to debt but also a slave to government.

For the stock market you can see it in a number of different decisions that of been made recently. There's a record amount of liquidity sitting in corporate accounts, and bank accounts, and investment accounts.

The government has made a lot of money available, primarily because IT NEEDS MONEY. It's very easy to see the recent Federal Reserve announcement that it will continue quantitative easing as only the continuation of a self-serving program for the federal government to be able to borrow more money conveniently in the open market.

So for those who need a little bit of a primer on how quantitative easing works, here goes.

The Federal Reserve Bank buys US treasury bonds in the open market that are already in the hands of private investors. The cash that private investors get has to be put someplace. It ends up in any one of a number of financial markets including the stock market, commodities markets, Forex markets. The wealth effect of higher financial markets and lower interest rates, the theory goes, should allow that wealth to, he he he, "trickle down" to Main Street.

The expansion of the Federal Reserve's balance sheet since 2007 above. Top brown color represents US-backed mortgage bonds. The gold color represents Long-Term Treasuries.

Of course under Obama the "trickle down" has been regulatory not money. The regulatory drag gives investors a lack of incentive to invest in other things besides financial assets, like the stock market, the commodities market, the Forex market.

Like what other things could they invest in? Jobs for example.

Some corporations are choosing not to reinvest that money in the operations of their own company- which would add to jobs- but instead are doing things like increasing dividends, increasing share buyback programs, and looking at strategic alternatives for unlocking the value in their companies.

In other words, the government's insatiable need for money combined with quantitative easing, has been the best thing for Wall Street perhaps ever. At least over the short-term. Long-term, we're pretty much screwed.