The monetary policies that were instituted during the recession of 2007-2009 have long outlived their usefulness.
Long periods of very easy monetary policy have consequences that are detrimental to the economy and the investment markets.
Yet, like trying to give up caffeine, returning to more standard or usual monetary policies and interest rates has become incredibly difficult for our central bankers and politicians.
As identified by former Federal Reserve Chairman, Ben Bernanke among others, long periods of zero interest rate policies and easy money have damaged the long term growth and productivity of the economy. Specifically, companies have undertaken financial engineering rather than capital investing in new plants, property and equipment so as to maintain a high level of liquidity, buy back shares and pay out large dividends to shareholders.
The result is a very low level of worker productivity which ultimately impacts our standard of living. This can be seen in the low level of worker participation in the economy and the decline of median family income since the last recession. Middle income America has not participated in the anemic economic recovery, while the asset deep upper class (homeowners and holders of stocks and bonds) have gotten significantly wealthier from the long running monetary stimulus.
Regardless of the income and wealth inequality, this is the policy of the current administration. These consequences can be traced back to a lack of sound fiscal policies (Obamacare, Dodd-Frank Act, higher corporate tax rates and disruptive tax policies and increases in personal income taxes, all in the face of lower family income).
While the administration and Congress have been unable to forge any helpful fiscal legislation, the burden of trying to stimulate the economy has fallen on the Federal Reserve and their monetary tools; low interest rates, quantitative easing and easy credit policies. The middle and lower income classes suffer under in these circumstances which can easily been seen by the nearly 50 million people who are now on food stamps and other welfare policies, the decline in median family income over the past eight years and the very low labor force participation.
U6, the old and most useful measure of unemployment shows around 10 percent of our worker bees are either unemployed or underemployed or just thoroughly discouraged and no longer looking for full time employment. To me it feels like a return to the discredited economic policies or the Nixon, Ford and Carter era. To be sure the eras are different, but the unemployment is nearly the same.
Yet hope is on the horizon. At the latest Republican debate a number of presidential hopefuls espoused economic policies that include a healthy dose of fiscal reforms and a reduction in the size and scope of the federal government. Tax reductions, zero based budgeting at the federal level (if you don’t know what this means, you had better Google it), a reduction in the regulatory reach of government, especially the EPA and the IRS among other measures and regulatory rollbacks that will get our economy growing not at 2 percent a year but closer to 4 percent or more.
Of course, we will have to elect one of these characters and then make sure they work with a Congress that can keep its members on track. There is a lot of hope on the table. Yet until the fiscal problems are addressed, you can expect the Federal Reserve to continue monetary easing with all its attendant consequences.
At least stock prices will remain high under the current policies.
