What should government do for the economy?
They should stop DOING so many things to start.
If you were worried about your 401k and retirement accounts bouncing around (mainly in the down direction), I wanted to offer you a small bit of insight. So I am writing this short post to give you a summary of what I think is really happening so you can make better decisions for yourself.
My conclusion, if you don’t want to read all of this, is that we are heading for a nasty recession. And a nasty further correction in markets. With a Fed that has no bullets left to bail your rear out like they did in 2009 (and 2002).
The Problem with Government and the Economy
You may see the weakness in stocks blamed on China, oil or all kinds of other BS. The truth is is that the global economy is not as strong as advertised. Something our levitating stock indices didn’t reveal until last summer.
But things have changed since the Federal Reserve stopped pumping money in the system. I argue that it was that stimulus, along with 0% rates, that boosted stocks, economic confidence and misallocated investment decisions in Americans. But, we are not under any kind of self sustaining growth – sorry.
An Aside: Market note – February 10, 2016
I need to address today’s market – I mean today Feb 10. Today’s market gyrations likely come from expected soothing words from Janet Yellen about a slowing down or reversal of Fed policy to raise rates. Folks if this is all people are banking on, and they are, then look out below.
If Yellen does offer soothing words (and she is a bit if you read the above linked Bloomberg article), expect a “Fed rally” in stocks. but don’t expect it to last too long. As I suggest in some of my blog posts, consider using rallies to get out of investments that you shouldn’t be in in the first place.
Note: when the Fed actually reverses courses and eases, then may see some real fireworks.
Our Government Knows How to Push Our Financial Buttons
Congress and the Fed know especially how Americans react to certain stimuli. They know that by creating frenzies, like with real estate in the 2000s, that they can get Americans moving and creating economic activity.
The problem is that this economic activity is often misallocated. With the problems showing up a few years later. We’ve basically been in a boom/bust swing period since 1995. With each boom and bust bigger as more of the economy gets involved.
Credit Growth – the Magic Pill
This time, the Fed and Congress have pushed money into stocks and real estate again. And CREDIT. Credit growth has pushed, among other things, auto sales to record highs. Along with record high loan terms (72= months average now!!).
Low rates have motivated wealthy people to buy real estate as an investment, over bidding, pushing first time buyers with 10-20% out of the market (bank won’t finance overpriced house).
Corporations have been motivated to buy back stock but not invest in their firms. The Economist article from 2013 points this out. Stock buybacks are ok but they’re short term thinking.
Look at the employment reports – business services (temp workers), service industry (restaurant waiters, massage therapists, and nannies), and health care (nurse aides for long term care centers) are the big job growth areas.
These among other imbalances stimulated us for a while. But like past episodes, this too is ending. We are out of stimulative gas. Japan just announced negative interest rates and stocks dropped! Can’t get cheaper money than that. Europe too.
What Should Government Do for the Economy? They Don’t Really KNOW What They Are Doing
THERE IS LITTLE REAL GROWTH. BUT A LOT OF BS
Record auto loans (and length of terms), home prices totally unaffordable, cost of services, insurances, other intangibles rising quickly. Not the results we want. But we sit and cheer the stock market as a distraction. Our health insurance premiums rose 14% this year!!!
One thing I have a major problem with, and I plan to write about this, is how our government abuses the optimism of the American spirit. If I told you that busts sometimes happen in the economy, you’d probably agree.
But central bankers and governments don’t like busts. It ruins their plans. They plan the future of everything on 2.5% growth and 2% inflation. So when this doesn’t happen, they panic. And then try to “fix” things. Sorry but just like the natural inclinations of a toddler, it can’t be “fixed.”
It Just Can’t Be Fixed
But their efforts to fix things distort what you see and influence you. And unfortunately we have to deal with that and the consequences. They motivate optimistic Americans to spend and invest more, often in excess. And worst of all, by the time middle class people have the courage to participate in these “booms,’ it’s near the top.
They take advantage of Americans’ innate optimism to motivate them to do dumb things to “get the economy going.”
Understand this – they (Fed and Congress) really don’t have all the answers. But they have to look like they do or some people will be worried that no one is in “control.”
Wait Isn’t That the Other Way Around?
Think about this. When the economy is doing well, prices of goods and services often rise. It’s a many times (but not always) a result of good economic activity. More demand = higher prices until more supply.
But central bankers think inflation is good because it often accompanies growth. So when they’re no growth, they try to instigate inflation first. As if higher prices will make the economy grow (yes if you need to get the 2.5%/2% thing going I suppose).
And you get dumb situations like this out of Japan:
“This clearly shows the BOJ wanted to weaken the yen and raise the price of import goods and boost inflation,” said Daisuke Karakama, an economist at Mizuho Bank in Tokyo. “We don’t know this negative rate policy will be good for the economy in the end,” he said, adding that success in Europe doesn’t guarantee the same for Japan. (Source: Bloomberg)
How does raising the price that people pay for things make the economy grow in REAL terms? How does that help people? Do you see the stupidity?
So what should government do for the economy? What do you think given what they’ve done.
Realize that no one is ever in control of “the economy.” Not central banks, not government. Once you realize that you make clearer decisions.
This article was my opinion. I had to get this off my chest. I offer no specific advice here, just don’t fall for the ridiculous Kool Aid coming from “on high.” Things will get messier. Be ready.