Before everyone celebrates the stock market at all time highs maybe they should ask why the Federal Reserve Bank has overnight rates at 0.25%.
The financial calamity of 2008 relieved the global banking system of around one trillion U.S. dollars. Therefore, in order to recapitalize itself, the global banking system needs to make around 1 trillion US dollars.
The Federal Reserve has made a dramatic, concerted effort to help the global banking system recapitalize itself principally by keeping rates at near zero. The current estimates place the recapitalization in the $300 to $400 billion range. While that is a wonderful gain by any measure, $300 to $400 billion is woefully short of the $1 trillion hole, over $500 billion short.
The next $500 billion will be much more difficult for the banks to recapitalize due to the new rules and regulations. While the Dodd/Frank and the Volker rule were created with very good intentions, as so many laws and rules and regulations are, the real impact of these new rules and regulations will be on the bank's bottom lines.
Both Dodd/Frank and the Volker Rule severely limit the businesses banks can pursue. This will create a difficult environment for banks to earn profits and thus, will only increase the time it will take for the global banking system to completely recapitalize itself. Therefore, the Federal Reserve will be obligated to continue the current near zero interest rate policy for a longer period of time than people have projected in order to continue assisting the global banking system to get closer to recapitalizing itself.
Now lets talk about the current U.S. government debt problem. The current U.S. deficit is now over 16.5 Trillion and growing every second. Even with the fiscal cliff being averted and the sequester, the U.S. government continues to operate in the red for Fiscal year 2013 by an estimated $800 billion. The CBO has similar projected deficit estimates for fiscal years 2014-16. These deficits will take our national debt to at least the 20 Trillion dollar level. TWENTY TRILLION DOLLARS!
At some point in the near future, the United States government will minimally have to balance the annual budget deficits in order to stop the total debt expansion, as well as make a real concerted effort to bring down the total national deficit in order to balance itself. This means the US will need to take $500 to $800 billion of government spending out of the U.S. economy. This spending hole is going to result in many quarters of negative growth. This is certainly not good for the U.S. stock markets or the global stock markets for that matter.
The current hope is that the U.S. will grow its way out of this debt problem. All I have to say about that is hope is not a viable plan. Therefore, the Federal Reserve will be forced to continue the current zero interest rate policy to help alleviate the spending void in order to keep the US economy from once again, slipping back into a recession.
While the stock market is trading near all time highs, the Federal Reserve must continue its near zero interest rate policy to recapitalize the World Banking system and to support the economy as spending cuts and tax hikes remove money from the economy to help stem the threat of another recession.
Written by Samory Borry
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