Posts
Today, when you open the business section of your newspaper or watch financial news on television, it is obvious that we have moved from an entrepreneurial economy toward a very centrally planned economy. Fiscal and monetary policies have become almost an obsession. Politicians and pundits have convinced most people that the government can and should solve any problems we have. And as you know, politics drives fiscal and monetary policy. Therefore, it is important that each of us have a longer-term understanding and outlook of the economy; and it must be as non-partisan as humanly possible.
Following is my view. This view may differ from yours because my assumption is that the economy and markets do not work, except on a very long-term basis, the way most people think they should.
First, we need to put the real economy (not just the political economy we read about every day) into context so we can distinguish the actual economy from the artificial, centrally planned economy. This makes it possible to see the two economies. Once you understand both, you will be in a position to develop a short-term plan for your business and your investments; and a longer-term plan for when these two economies collide.
Most people think that when the economy (GDP) grows, corporate profits grow which causes stock prices to increase. This is true if you are thinking very long-term. But what really causes the economy to grow is when the government increases the money supply (prints money.)
GDP growth, by definition, is only possible if you increase the money supply. If the money supply did not increase, you would have a fixed number of dollars in the economy. Therefore, increased spending in one area of the economy would cause a decline in another area with net, aggregate growth of zero.
If the definition of economic growth was more wealth, rather than more money, the economy could certainly grow if GDP stays at zero. Think about how technology has increased our wealth over the years at the same time that prices were are being consistently reduced.
However, the problem with increasing the money supply is:
1.It decreases the value of the dollar, reducing buying power, which then causes inflation.
2.It causes malinvestments (investments go into marginally productive ventures that cannot sustain themselves once interest rates rise or when credit or money is withdrawn from the financial system.) It can/does cause bubbles.
3.It reduces the ability of productive companies to obtain the capital they need) long-term) crowding out real productive ventures.
Current fiscal and monetary policy
The Federal Reserve Bank, using a government (Keynesian) periscope, has decided that we are not de-leveraging (bringing prices back to equilibrium); we are instead close to falling into deflation. This Keynesian definition means a chronic slowing of consumer spending or demand. It is not the original or traditional definition of deflation which is a contraction of the money supply.) Therefore, the Fed is expected to soon (maybe in November) begin the second round of quantitative easing (printing money.)
Therefore, to increase consumer demand, the Fed plans to hold interest rates artificially low and pump money into the banking system to incentivise the consumer. This, plus continuous stimulus programs and overspending tax collections have not worked to date. Some of the reasons are:
1.Banks have over $1 trillion in excess reserves but are not lending (for several reasons) so credit expansion is not occurring which is necessary to hype demand
2.We have had over $900 billion in stimulus programs plus $2.7 trillion in “additional” government spending over the past two years. GDP has risen by about $800 billion over the same two-year period.
3.A lot of this money has found its way into emerging countries in the form of investments. Two emerging countries have started to tax foreign investment funds in order to slow down their growth.
Conclusion
Government (fiscal and monetary) policy cannot continue down this same path much longer without it causing horrendous inflation. Our debt and committed future obligations already exceed 100% of current, tax collections for many decades into the future.
Plus, we still have many significant economic problems before the economy can really begin to grow including the financial system, housing, over-levered consumers, unemployment, states and municipalities in serious deficits and asking the federal government to bail them out (estimates are around $300 billion now) and many more.
Therefore, unless there is a clear change in government policy (by both political parties,) it appears that additional stimulus, low interest rates and excessive printing of money will continue. Since money supply is the initial driver of our economy, the GDP number may stay positive and above water. But, this printing and spending money plus low interest rates will require investors to make significant changes in all asset classes.
Thursday, October 21, 2010
Monday, October 4, 2010
Does The Economy Drive The Stock Market?
What drives the capital markets? Is it the economy or something else? The short answer of course is the economy, but only over the long term. There is much more to it than a simple, if A then B.
I recently read an excellent article by Kel Kelly (writer and former trader)who ties the business cycle into the relationship between the economy and the markets. I thought I would share my interpretation of some of his thoughts with you. This will take several articles but I think you will get a better understanding of the relationship between the market and the economy.
If you listen to the pundits and the media, you get the impression that capital markets are driven by things like:
1. Psychology or crowd behavior or “animal spirits”,consumer sentiment or
2. Technological analysis or patterns of behavior (charts), instant correlations or
3. Data points like corporate earnings or expected earnings, revenues or
4. Marginal economic data points like consumer spending, interest rates, GDP growth, increasing or decreasing labor costs, etc.
In the real world, the most common view is that the economy drives the markets. As the economy (GDP) grows, corporate revenues and profits grow. This growth increases profits and the value of the company, which is then reflected in the stock price. The reverse is also true; if the growth rate of the economy declines, profits are reduced and stock prices fall.
While this view is basically correct, over the long term; you could have a difficult time predicting where the market is headed in the short-term. I looked at the quarterly, rate of change in the economy and the S&P500 over the past ten years. The correlation for the two is 0.40. Not that strong a relationship.
Yet, most economists and pundits today use at-the-margin data points (for example, a monthly turn in the data, a two or three month trend, etc.) to predict the future direction of the economy. This is a backward looking view of the economy not a forward-looking view. Plus, they are always waiting for the next data point rather than making a definitive decision. By the way, you have to stay tuned for tomorrow’s new, backward-looking data.
Can you remember the last time one of these projections was correct? Just to add a little humor into this, how about the National Bureau of Economic Research’s ruling a few weeks ago, after 18 months of rigorous analysis, that the current recession ended in March of 2009.
Real force driving the stock market
Over the next few articles, I hope to show that the real force driving the market, over the longer term, is changes in the quantity of money and the volume of spending in the economy. This precedes the rise in GDP (economy.) In other words, capital markets rise when the money supply is inflated and stocks fall when the money supply contracts (note: they can fall for other reasons as well.)
I recently read an excellent article by Kel Kelly (writer and former trader)who ties the business cycle into the relationship between the economy and the markets. I thought I would share my interpretation of some of his thoughts with you. This will take several articles but I think you will get a better understanding of the relationship between the market and the economy.
If you listen to the pundits and the media, you get the impression that capital markets are driven by things like:
1. Psychology or crowd behavior or “animal spirits”,consumer sentiment or
2. Technological analysis or patterns of behavior (charts), instant correlations or
3. Data points like corporate earnings or expected earnings, revenues or
4. Marginal economic data points like consumer spending, interest rates, GDP growth, increasing or decreasing labor costs, etc.
In the real world, the most common view is that the economy drives the markets. As the economy (GDP) grows, corporate revenues and profits grow. This growth increases profits and the value of the company, which is then reflected in the stock price. The reverse is also true; if the growth rate of the economy declines, profits are reduced and stock prices fall.
While this view is basically correct, over the long term; you could have a difficult time predicting where the market is headed in the short-term. I looked at the quarterly, rate of change in the economy and the S&P500 over the past ten years. The correlation for the two is 0.40. Not that strong a relationship.
Yet, most economists and pundits today use at-the-margin data points (for example, a monthly turn in the data, a two or three month trend, etc.) to predict the future direction of the economy. This is a backward looking view of the economy not a forward-looking view. Plus, they are always waiting for the next data point rather than making a definitive decision. By the way, you have to stay tuned for tomorrow’s new, backward-looking data.
Can you remember the last time one of these projections was correct? Just to add a little humor into this, how about the National Bureau of Economic Research’s ruling a few weeks ago, after 18 months of rigorous analysis, that the current recession ended in March of 2009.
Real force driving the stock market
Over the next few articles, I hope to show that the real force driving the market, over the longer term, is changes in the quantity of money and the volume of spending in the economy. This precedes the rise in GDP (economy.) In other words, capital markets rise when the money supply is inflated and stocks fall when the money supply contracts (note: they can fall for other reasons as well.)
Friday, September 10, 2010
What are banks going to do with their 1+ trillion dollars in excess reserves?
If you follow the money, you know that banks (after bailouts, Fed purchases of toxic assets, guarantees, etc.) now have over $1 trillion in excess reserves per the Federal Reserve. Banks normally lend this money out and with over $1 trillion of reserves; they could create over $80 trillion in new credit. But is this a reality in today’s environment?
The housing problem is still not solved and will require banks to write off billions more in “bank assets.” They could loan this money to businesses, but few of them really want to take on additional loans with the economy in such bad shape. They could lend to consumers but they can’t afford more debt and their FICO scores have dropped making them less “qualified.” Anyway, consumers have decided to become more frugal.
If banks were to pump out trillions of dollars in new credit that went directly into the economy (to companies producing goods and services and consumers buying goods and services), it would certainly cause GDP to spike up and maybe we would be off to another bubble. But, adding that much credit into the economy would significantly reduce the value of the dollar and thereby cause serious inflation.
Yet, this is what a lot of people think will happen. The government continues to spend money hoping to fill the demand gap in the economy. The Federal Reserve keeps “printing money” for the government to spend; and at the same time, keeps interest rates low to encourage spending and to help prop up the housing market. Once everything becomes perfect again, the government can cut spending and the Federal Reserve can contract the money supply eliminating the threat of inflation. Bingo! Utopia.
Since we know this is a fairy tale, how about another alternative for all those “excess reserves” the bank has. What if this “excess” money in the banking system simply gets re-circulated. Banks could put all that money back into the financial system rather than back into the economy (the goods and service producing segments.) For example, they could buy assets like stocks, bonds, gold, real estate, etc. (GDP wouldn’t go up much.) They could buy these assets around the world (reducing the inflation potential here) and they could finance real things like factories, but overseas (Oh, darn, they couldn’t bring the profits home because of taxes.)
Is it possible? I don’t know. I am not a conspiracy theorist but we have to keep our critical thinking skills sharp and keep looking for possible alternative futures.
The housing problem is still not solved and will require banks to write off billions more in “bank assets.” They could loan this money to businesses, but few of them really want to take on additional loans with the economy in such bad shape. They could lend to consumers but they can’t afford more debt and their FICO scores have dropped making them less “qualified.” Anyway, consumers have decided to become more frugal.
If banks were to pump out trillions of dollars in new credit that went directly into the economy (to companies producing goods and services and consumers buying goods and services), it would certainly cause GDP to spike up and maybe we would be off to another bubble. But, adding that much credit into the economy would significantly reduce the value of the dollar and thereby cause serious inflation.
Yet, this is what a lot of people think will happen. The government continues to spend money hoping to fill the demand gap in the economy. The Federal Reserve keeps “printing money” for the government to spend; and at the same time, keeps interest rates low to encourage spending and to help prop up the housing market. Once everything becomes perfect again, the government can cut spending and the Federal Reserve can contract the money supply eliminating the threat of inflation. Bingo! Utopia.
Since we know this is a fairy tale, how about another alternative for all those “excess reserves” the bank has. What if this “excess” money in the banking system simply gets re-circulated. Banks could put all that money back into the financial system rather than back into the economy (the goods and service producing segments.) For example, they could buy assets like stocks, bonds, gold, real estate, etc. (GDP wouldn’t go up much.) They could buy these assets around the world (reducing the inflation potential here) and they could finance real things like factories, but overseas (Oh, darn, they couldn’t bring the profits home because of taxes.)
Is it possible? I don’t know. I am not a conspiracy theorist but we have to keep our critical thinking skills sharp and keep looking for possible alternative futures.
Monday, August 30, 2010
Bernanke Said What?
Since the housing market peaked and the financial crisis began, the government has spent:
$3.6 trillion (net after some repayments) on various stimulus programs,
$16.3 trillion in government guarantees to various financial institutions; plus
$7.2 trillion in federal government spending (the budget) trying to hold up the economy.
That’s a lot of money for a $14 trillion dollar economy. Yet the net result so far is an economy barely growing at 1.6 %, unemployment at 9.5% (or 17% depending on how you count unemployment,) a very troubled housing problem (inventories last month were at 12.5 months supply) and a financial system that can’t afford to lend (for fear of future defaults and/or the risk-free money they are getting because of Fed policy.) And this is only a few of our problems.
Now, last Thursday at the Jackson Hole Conference (isn’t that more expensive than Las Vegas,) we were told by Federal Reserve Chairman Bernanke that he has changed his mind and the economy may be showing down even more than he thought. Also, that the economy can not even handle the Fed keeping the interest and early payoff money the Fed is receiving from the bonds it purchased. That he is going to spend that money as fast has he receives it rather than shrink the Fed’s balance sheet. What a confidence builder. Plus, and this a big one, that the Fed is ready to print more money, in addition to what they have already done, to keep the economy going.
We have been debating how the Fed is gong to reduce its balance sheet. Now we learn that even the simplest reduction seems impossible. So get ready for Quantitative Easing, round 2.
As you know, critical thinkers have to look at all sides of the argument. Here is a summary of their analysis and proposals.
The Keynesians, economists like Paul Krugmanand and James Galbraith, want the government to significantly spend more money because we didn’t spend enough to begin with. They say the economy is not recovering at all. Federal Reserve policy has been “grossly inadequate”. The Fed should increase its balance sheet from $2 trillion to $4 or $6 trillion (would this cause a printing company bubble?) Most economists are Keynesians and they are putting a lot of pressure on Congress and the Federal Reserve to stimulate more and print more money. They, as always, are concerned only about the short-term.
The Keynesian-lite or Supply-side economists like Brian Wesbury or Larry Kudlow want additional tax cuts and more incentives for businesses to expand and hire employees. They say the economy is recovering, but very slowly. I am not sure they still believe in the V shaped recovery. They also claim that uncertainty, especially in tax policy, healthcare policy and undefined new financial regulations are some of the reasons the economy is not growing faster. They also believe tax cuts and incentives will result in more production which will keep inflation low. But, since a tax cut without an offsetting spending reduction is a stimulus, it would mean more borrowing, more quantitative easing. They too are only concerned about the short-term.
The Capitalists like Peter Schiff, Mark Faber and other Austrian economists want the government to get out of the way and let the economy heal itself. Sooner or later, we have to get to price equilibrium (in housing, wages, interest rates, etc.) They say the government has already spent far too much money. They believe that the free market, if left alone, will self-correct. That is how we get to the bottom. That is a recovery, getting rid of the excesses. All this government intervention is doing is delaying the recovery and laying a base for the next boom or bubble. The mal-investments caused by artificially low interest rates and the excessive expansion of money not only delays recovery but cause the next boom. For example, what is going to happen to wind power when the stimulus goes away? Or what’s going to happen to bond prices when inflation (caused by inflating the money supply) begins to rise rapidly?
We all see the economy through different lenses, but I am sure you will agree that most Americans think spending and then printing the money are out of control. Short-term and long-term. We may not be able to go from over indulgence to austerity in one step, but we sure need a plan and we sure need to get started.
$3.6 trillion (net after some repayments) on various stimulus programs,
$16.3 trillion in government guarantees to various financial institutions; plus
$7.2 trillion in federal government spending (the budget) trying to hold up the economy.
That’s a lot of money for a $14 trillion dollar economy. Yet the net result so far is an economy barely growing at 1.6 %, unemployment at 9.5% (or 17% depending on how you count unemployment,) a very troubled housing problem (inventories last month were at 12.5 months supply) and a financial system that can’t afford to lend (for fear of future defaults and/or the risk-free money they are getting because of Fed policy.) And this is only a few of our problems.
Now, last Thursday at the Jackson Hole Conference (isn’t that more expensive than Las Vegas,) we were told by Federal Reserve Chairman Bernanke that he has changed his mind and the economy may be showing down even more than he thought. Also, that the economy can not even handle the Fed keeping the interest and early payoff money the Fed is receiving from the bonds it purchased. That he is going to spend that money as fast has he receives it rather than shrink the Fed’s balance sheet. What a confidence builder. Plus, and this a big one, that the Fed is ready to print more money, in addition to what they have already done, to keep the economy going.
We have been debating how the Fed is gong to reduce its balance sheet. Now we learn that even the simplest reduction seems impossible. So get ready for Quantitative Easing, round 2.
As you know, critical thinkers have to look at all sides of the argument. Here is a summary of their analysis and proposals.
The Keynesians, economists like Paul Krugmanand and James Galbraith, want the government to significantly spend more money because we didn’t spend enough to begin with. They say the economy is not recovering at all. Federal Reserve policy has been “grossly inadequate”. The Fed should increase its balance sheet from $2 trillion to $4 or $6 trillion (would this cause a printing company bubble?) Most economists are Keynesians and they are putting a lot of pressure on Congress and the Federal Reserve to stimulate more and print more money. They, as always, are concerned only about the short-term.
The Keynesian-lite or Supply-side economists like Brian Wesbury or Larry Kudlow want additional tax cuts and more incentives for businesses to expand and hire employees. They say the economy is recovering, but very slowly. I am not sure they still believe in the V shaped recovery. They also claim that uncertainty, especially in tax policy, healthcare policy and undefined new financial regulations are some of the reasons the economy is not growing faster. They also believe tax cuts and incentives will result in more production which will keep inflation low. But, since a tax cut without an offsetting spending reduction is a stimulus, it would mean more borrowing, more quantitative easing. They too are only concerned about the short-term.
The Capitalists like Peter Schiff, Mark Faber and other Austrian economists want the government to get out of the way and let the economy heal itself. Sooner or later, we have to get to price equilibrium (in housing, wages, interest rates, etc.) They say the government has already spent far too much money. They believe that the free market, if left alone, will self-correct. That is how we get to the bottom. That is a recovery, getting rid of the excesses. All this government intervention is doing is delaying the recovery and laying a base for the next boom or bubble. The mal-investments caused by artificially low interest rates and the excessive expansion of money not only delays recovery but cause the next boom. For example, what is going to happen to wind power when the stimulus goes away? Or what’s going to happen to bond prices when inflation (caused by inflating the money supply) begins to rise rapidly?
We all see the economy through different lenses, but I am sure you will agree that most Americans think spending and then printing the money are out of control. Short-term and long-term. We may not be able to go from over indulgence to austerity in one step, but we sure need a plan and we sure need to get started.
Thursday, August 5, 2010
Get Ready For the Next Big Stimulus Program
The government has been trying to hold housing prices up for two years without much success. Many “experts” agree that we will see another drop in housing prices due to high prices, lack of demand, unemployment, wages, etc. It has also been estimated that an additional 10% drop in prices is possible (which would get us to about the 50 year trend line) which would put a significant number of additional residential mortgages under water (negative equity). Being underwater is one of the major (if not main) reasons people walk away from their mortgage commitment. Plus, the economy is not helping and may be turning down again.
So with politician’s approval ratings extremely low and pressure from their economic advisors (Keynesian economists in both parties) to put more stimulus into the economy, it might happen soon. Evidently, the trillions spent so far haven’t been enough (for example, “The Third Depression” Paul Krugman in the NYTimes) to turn the economy around yet. Now add to this, the clamor (after financial reform?) to do something about Freddie Mack and Fannie Mea (FNF).
It would be a lot faster to “do something about housing” then turnaround the economy in the next three months. Some are now thinking that the government will begin a massive, new, program of mortgage modifications where FNF will offer low, permanent interest rates on reduced mortgage amounts. This may happen before the election. The money was allocated a year ago when FNF were given unlimited funding authority (at least up to $1 trillion) even though they had not used the $200 billion already allocated at that time. After all, they are owned by the government where spending has no limits. Also, the government does not have to go to Congress for this as it has already been “approved.”
If you are a Keynesian, this kind of spending and short-term fix makes sense. Spending is what you must do in a recession. If you are a capitalist, you understand that this will only add to our problems short- and long-term; prolong the recession; and increase inflation further.
So with politician’s approval ratings extremely low and pressure from their economic advisors (Keynesian economists in both parties) to put more stimulus into the economy, it might happen soon. Evidently, the trillions spent so far haven’t been enough (for example, “The Third Depression” Paul Krugman in the NYTimes) to turn the economy around yet. Now add to this, the clamor (after financial reform?) to do something about Freddie Mack and Fannie Mea (FNF).
It would be a lot faster to “do something about housing” then turnaround the economy in the next three months. Some are now thinking that the government will begin a massive, new, program of mortgage modifications where FNF will offer low, permanent interest rates on reduced mortgage amounts. This may happen before the election. The money was allocated a year ago when FNF were given unlimited funding authority (at least up to $1 trillion) even though they had not used the $200 billion already allocated at that time. After all, they are owned by the government where spending has no limits. Also, the government does not have to go to Congress for this as it has already been “approved.”
If you are a Keynesian, this kind of spending and short-term fix makes sense. Spending is what you must do in a recession. If you are a capitalist, you understand that this will only add to our problems short- and long-term; prolong the recession; and increase inflation further.
Tuesday, July 6, 2010
If Bernanke continues to punish savers, should you change your strategy?
If Fed Chairman Bernanke continues to punish savers by holding (“for an extended period”) interest rates at extremely low levels, should you increase your risk and buy higher yielding bonds and preferred stocks? His actions seem to indicate that is what he wants you to do.
Before doing this simply by increasing risk (lower rated bonds) or extending maturities (going from short-term to long-term bonds), you should consider approaching the income portion of your portfolio with a strategy hedge funds use to reduce some of this risk. Think about both principal risk (return of principal) and market risk (volatility of your principal.)
You know that selecting strong companies or government bonds (with taxing authority) that have the financial ability to pay the principal (at maturity) plus every interest/dividend payment should reduce your principal risk.
But there are ways you can also reduce your market risk. Start by asking, “What could cause my principal value to decline during my holding period?” One big reason is inflation or an increase in interest rates.
Therefore, to hedge or minimize market risk (principal volatility), you would want to purchase a security that moves in the opposite direction of the security you purchased for income. When one security goes up in value, the other goes down. This should leave your principal “flat” while you collect the higher interest rate.
Stocks too, may require a different strategy
A protracted slow growth period for the economy will have its effect on stocks as well. It may be very difficult to increase revenues, maintain margins and earnings, etc.; so you may want to consider stocks that are not dependent on the economy for growth.
Look at companies that have a product or service whose success depends on the growth and acceptance of their product rather than on the success (general growth) of the economy. It helps if they are not limited to the U.S. economy only, but are able to sell worldwide. Also, in this environment, it might help if they do not need to raise money for the next few years.
Before doing this simply by increasing risk (lower rated bonds) or extending maturities (going from short-term to long-term bonds), you should consider approaching the income portion of your portfolio with a strategy hedge funds use to reduce some of this risk. Think about both principal risk (return of principal) and market risk (volatility of your principal.)
You know that selecting strong companies or government bonds (with taxing authority) that have the financial ability to pay the principal (at maturity) plus every interest/dividend payment should reduce your principal risk.
But there are ways you can also reduce your market risk. Start by asking, “What could cause my principal value to decline during my holding period?” One big reason is inflation or an increase in interest rates.
Therefore, to hedge or minimize market risk (principal volatility), you would want to purchase a security that moves in the opposite direction of the security you purchased for income. When one security goes up in value, the other goes down. This should leave your principal “flat” while you collect the higher interest rate.
Stocks too, may require a different strategy
A protracted slow growth period for the economy will have its effect on stocks as well. It may be very difficult to increase revenues, maintain margins and earnings, etc.; so you may want to consider stocks that are not dependent on the economy for growth.
Look at companies that have a product or service whose success depends on the growth and acceptance of their product rather than on the success (general growth) of the economy. It helps if they are not limited to the U.S. economy only, but are able to sell worldwide. Also, in this environment, it might help if they do not need to raise money for the next few years.
Monday, June 28, 2010
If: the economy continues to slow down and the government does not pass new stimulus programs, will the U.S. head into a deflationary spiral?
Recent economic data and Chairman Bernanke’s recent statement suggest the economy is slowing down. The “’09 stimulus package” has peaked and its effects will be gone by the end of the year. The G20 agreement reached over the weekend says governments “agree” to cut their deficits by 50% within two years. The U.S. would have to cut almost $800 billion of the $1.5 trillion deficit in 2010 alone. Good luck with that. Here are some reactions:
Keynesian (Demand-Side) economists are up in arms. Paul Krugman in an article in the New York Times today has an article titled, “The Third Depression.” He states that we are worried about inflation when the real problem is deflation; and the failure to stimulate (re-inflate) the economy will result in a long, Japanese style deflationary environment. He has suggested another $one trillion in stimulus.
The Keynesian-lite (Supply-Side) economists are still convinced the economy is turning around (although they have become less passionate in the past week) and that inflation is the potential risk. They do want taxes reduced to create jobs (but without cutting spending, you simply have a different type of stimulus program.)
The Capitalist economists see de-leveraging or deflation which is normal after our world-wide, gigantic credit bubble fighting inflation (low interest rates and the massive printing of money.) If this deflation-inflation struggle continues, it will take a long time to get to price equilibrium (e.g., bottom on home prices) and the amount of money created by that time will cause huge inflation. Therefore, the sooner the government gets out of the way, the sooner the recovery can begin.
Since we have a mixed economy rather than a capitalist economy, I do not expect the government to get out of the way. And since we have Keynesian government and Federal Reserve, I expect more stimulus rather than austerity.
However, many taxpayers are upset with all the spending. I had expected another large stimulus package this year, but one large stimulus package does not seem viable in this climate. Then, I expected to see the large stimulus package broken down into smaller pieces (a $50 billion package for unemployment benefits, a $50 billion package to help the states, an $8 billion package to hold up home prices, etc.). But last week, the Senate was unable to get closure on the unemployment package and therefore could not vote on it.. This might signal that additional stimulus through fiscal policy, may be difficult to do.
However, I think the answer to question posed is no. The government is to frightened of deflation to let it happen. Therefore, the Fed and Chairman Bernanke may be called upon to stimulate the economy through monetary policy (keep interest rates low and print, print, print money.)
Keynesian (Demand-Side) economists are up in arms. Paul Krugman in an article in the New York Times today has an article titled, “The Third Depression.” He states that we are worried about inflation when the real problem is deflation; and the failure to stimulate (re-inflate) the economy will result in a long, Japanese style deflationary environment. He has suggested another $one trillion in stimulus.
The Keynesian-lite (Supply-Side) economists are still convinced the economy is turning around (although they have become less passionate in the past week) and that inflation is the potential risk. They do want taxes reduced to create jobs (but without cutting spending, you simply have a different type of stimulus program.)
The Capitalist economists see de-leveraging or deflation which is normal after our world-wide, gigantic credit bubble fighting inflation (low interest rates and the massive printing of money.) If this deflation-inflation struggle continues, it will take a long time to get to price equilibrium (e.g., bottom on home prices) and the amount of money created by that time will cause huge inflation. Therefore, the sooner the government gets out of the way, the sooner the recovery can begin.
Since we have a mixed economy rather than a capitalist economy, I do not expect the government to get out of the way. And since we have Keynesian government and Federal Reserve, I expect more stimulus rather than austerity.
However, many taxpayers are upset with all the spending. I had expected another large stimulus package this year, but one large stimulus package does not seem viable in this climate. Then, I expected to see the large stimulus package broken down into smaller pieces (a $50 billion package for unemployment benefits, a $50 billion package to help the states, an $8 billion package to hold up home prices, etc.). But last week, the Senate was unable to get closure on the unemployment package and therefore could not vote on it.. This might signal that additional stimulus through fiscal policy, may be difficult to do.
However, I think the answer to question posed is no. The government is to frightened of deflation to let it happen. Therefore, the Fed and Chairman Bernanke may be called upon to stimulate the economy through monetary policy (keep interest rates low and print, print, print money.)
Subscribe to:
Posts (Atom)