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Originally posted by 1967 R50/2
A bit of cart beforet he horse.
The budget was balanced during the Clinton years largely through capital gains taxes from the booming stock market. The stock market did not boom because of a balanced budget.
The fact is that the stockmarket does not require a balanced budget to do well because, by and large, the Federal balance sheet is independent from the many corporate balance sheets that make up share trading companies.
That the market does not need a balanced budget is empirically demonstrated by performance of the last 5 years, which has generally been upward.The budget has never been balanced during that time. Ditto during the Reagan years and the stock market rise then.
Finally, Greenspan did not "lower the boom" on the stock market. Greenspan made his famed "irrational exhuberence" statement in 1996... a full 4 years before the 2000 decline of the market. His interest rate moves also preceded the collapse substantially. But given the incredibly high tech P/Es of the time, I doubt anyone could ever justify them, regardless of the interest rate. They were indeed, quite irrational.
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Don't think so. Balanced budgets boomed the market, reflecting consumers' confidence in the future. It wasn't the market that balanced the budget. Stocks are worth what people are willing to pay. Strictly supply and demand.
I'm an investor and was a daily market watcher during this period. The market took a hit when Greenspan said irrational exuberance--and it was shortly before he started raising interest rates--stating he was concerned about inflation--which didn't exist. The market took a hit every time he raised the rates, and it was the summer of 2000 before the elections. That big anti-trust case against Microsoft at the time was also a killer for tech stocks. It cast the whole computers future into question.
Capital investment collapsed when Greenspan raised rates, and growth funds still haven't come back that well, after eight years. The main movers have been small to mid company value stocks.
When Bush took office, Greenspan lowered interest rates 4 times in Jan 01 (!), as soon as Bush was inaugurated; the Microsoft anti-trust suit was settled, and the market slowly rebounded. But the average American had to live with 1% CDs for years, which more than offset those tax cuts. I know it cost me.
Some people think Greenspan killed the market to get Bush elected. Books have been written about it. I think he may have been more concerned about the market being overvalued. And I think he just did it again recently, with his statement about a possible recession in 07. That aggravated the U.S. market at a time when there had just been a foreign correction.
Greenspan doesn't like the market to get ahead of itself. He believes that stock prices should be tied to company fundamentals. I believe stock prices also reflect the confidence of the investor in the future. If things look good to them, they will pay more. In that sense, he may have been right this time: the market is doing fairly well considering the current state of affairs.