Did the Fed choose stimulus over dollar stability? The greenback fell and gold rose after the FOMC signaled today that it would keep its balance sheet steady by reinvesting the proceeds of mortgage bonds into Treasuries. This is the first Fed policy shift in about a year. It comes in response to a slower economy and disappointing job numbers, with the Fed downgrading its economic outlook in its FOMC statement.
By itself, this is a modest move. But it could be the start of something bigger. If recovery conditions continue to slow, the Fed could be more aggressive by monetizing more Treasury debt and expanding the balance sheet to print money. If it does that, the dollar will depreciate more and gold will rise more. A lot more.
But here’s the central problem. The Fed can print more money, but it can’t print jobs — or capital formation, or productivity. With a trillion dollars of excess bank reserves already in the system, there’s no shortage of money. The recovery is being held up by the tax-and-regulatory threats and anti-business attitude coming out of Washington.
Today, for example, the House passed a $26 billion spending plan to bail out Democratic blue states and government unions. That money could have been used to extend the 2003 tax cuts on upper-income earners and investors. And part of this state bailout is a tax hike on the foreign earnings of big corporations. Of course, on top of that, nobody understands how Obamacare mandates and regulations will ultimately affect the cost of doing business and the hiring of new workers.
So in terms of Fed money-pumping, you can lead a horse to water, but you can’t make it drink. You can add more cash, but that doesn’t mean businesses and entrepreneurs will use it. Fiscal policy is the obstacle right now, not a shortage of money.
Oh, by the way, did you see the USA Today report that federal workers now earn double their private-sector counterparts? Total pay and benefits come to about $123,000 for federal workers in 2009, compared with $61,000 for private-sector workers. And who’s paying for that? You are. And President Obama wants a 1.4 percent across-the-board pay hike for the federal workforce in 2011.
It’s all a matter of priorities. Who do you trust? Well, Washington trusts government. So the private sector is very slow to spend and invest.
Kudlow is unable to look beyond the government. It never occurred to him that “the problem” might not be with the government. Maybe the worldwide recession isn’t a result of U.S. government tax rates but an imbalance that had been growing for decades. Maybe the fact that consumers are swamped in consumer debt has something to do with it. Maybe the fact that many homeowners are underwater in their mortgages has something to do with the sluggish recovery.
Like many supply-siders, Kudlow believes that the only engine of the economy is the supply side. Supply-Side Godfather Arthur Laffer writes in a recent book that demand is not a problem. There is never any lack of demand even in poor countries like Bangladesh. The problem is supply. I’d like to see Laffer open up a BMW dealership in a Bangladesh slum and see how high the demand is there.
Whether it fits your pre-drawn conclusions about economic growth or not, consumer demand has been a major engine in not just the U.S. economy but the world economy over the past decade. Look at China. Its double-digit economic growth over the past decade is a result primarily of producing products to be sold in the U.S. and European markets. In the past couple of years as U.S. consumers reduced consumption so much due to high debt levels that China’s economic growth has decreased considerably.
Back in 2002 after September 11 the Fed reduced interest rates to spur the economy. Consumers were able to borrow at extremely low interest rates to fund consumption. Auto dealerships were providing loans at zero percent interest rates. Then housing boomed. Low interest mortgages permitted people to buy more house for less monthly payments. The construction industry boomed as a result of this along with real estate brokers, mortgage brokers, the lending industry and title attorneys. This was all spurred by high demand. As housing values increased, homeowners were able to get low interest home equity loans to finance even more spending thereby fueling electronic, travel and tourism and other industries. President Bush reducing the top personal income tax bracket from 39% to 36% probably had very little to do with the booming economy of the mid-00s.
Then it crashed starting with home values. Those who has low interest adjustable mortgages saw the interest rates on their mortgages adjust upwards. People were able to refinance until real estate values tanked. Then they were stuck with high monthly payments. As real estate values tanked nationwide, consumers lost trillions in wealth. They reduced consumer spending considerably. No more new cars. No more big screen TVs. No expensive cruises or vacations. No new decks or new bathrooms or remodeling.
This is what caused the current depression, and the same parameters exist today. Millions of homeowners are underwater in their mortgages. Millions of people are unemployed. People who are employed are saving just in case they lose their jobs as business and local governments are strapped and looking for areas to cut.
The problem was not caused or worsened by government fiscal inputs. It’s going to take years to turn around and decades to recover from. Those that think that the economy rises and falls based on supply side factors only are only seeing half the picture.
Reply to this commentLinkReport AbuseSnooki,
You're flat out wrong about the housing market in the past decade--after I return something which I borrowed, I don't lose anything. This is a more accurate description of what happened to the homeowners you describe. These people never had wealth before they signed their loan docs, while they had their homes, or after they "lost" them.
Also, the term "fiscal input" doesn't mean anything. How does a bank, including the Fed input something without it their also being an output from somewhere else? Why do you suppose it's called a Balance Sheet?
Reply to this commentLinkReport AbuseSnooki needs to learn a thing or two about economics in general, and supply-side theory in particular. Ironically, Bangladesh (impugned by Snooki) has successfully employed a supply-side strategy of microcredits for entrepeneurs - - encouraging people to start businesses, produce, and build wealth, and the economy has benefited. If the U.S. continues to slouch towards socialism and central control, it will be the U.S. that will need to seek financial assistance from Bangladesh in the foreseeable future.
Reply to this commentLinkReport AbuseAs the cost of "public" employees in terms of pay and benefits has gone up there is increasing pressure to claw back the money, and to put limits on hiring. Bell, California comes to mind. Now even some Democrats are crying enough. When the supply of something gets too high the demand for it goes lower. If you look at "regulations" as a commodity there seems to be an oversupply of high cost ones and thus the demand for regulation drops. There is a lot of money out there that fear is keeping out of circulation, thus money is tight, the Government can print more money but if there is fear it won't help. Of course if you hit a point where there is too much money the fear of loss of the value of the money could suddenly overcome the other fears. So Kudlow is right as far as my simple mind can tell.
Reply to this commentLinkReport Abuse@ Snooki
How can you completely ignore government out of the equation in regards to our economic crisis? They purposely had their hands all over it all in the name of the American Dream. I'm sorry but people don't have a right to live in a 2500 sq foot home to be paid for by others.
In one sentence you say "the problem might not be the government." Then you rant about consumer debt and home owners being underwater. Hello, who was it encouraging consumers to go into debt? Government via left wing liberal "affordable" housing policies that did what? Wait for it...forced banks to give out sub prime mortgages to be backed by Fannie and Freddie (GSEs). Now those GSEs are going to need over $1 TRILLION in bailouts because loans were given out to idiots with zero to very little money down without having to prove their incomes in many cases. The house of cards don't have to fall completely. Only a small fraction is required for a crippling trickle down effect which obviously occurred.
About 25% of the foreclosures are happening in the backward state of CA. Their government was limiting the supply of houses allowed to be built. What happens when demand is high and supply is low? The price goes up and if government is the cause of it, home values are then artifically driven higher.
I am not going to get into supply side or whatever curve argument here because I believe in the abolishment of the IRS completely and implementing a 10% national sales tax (yes, real spending cuts are necessary). Due to our discriminating, unfair tax laws (73,000 pages) and of particular note to this discussion, the home tax interest deduction, home values are artifically inflated by 20-25%. Meaning what? Your monthly payment is higher. Your interest is higher. Your property taxes are higher. Your overall debt you rant about is higher. Your wealth building is harder. This is all courtsey of a big caring government.
Despite not being able to pay for it, Obama just gave out home buyer tax credits to fuel the economy of up to $10K depending on your circumstances. I am sure you will ignore this "govt" wealth transfer (taking from one group and giving it to an unearned group) or as you put it - fiscal inputs.
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