If it were easy to solve a country’s structural economic weaknesses with monetary policy, most countries in the world would have done so by now. The Fed’s QE3 policy of continually adding $85 billion a month to its portfolio of Treasury securities and mortgage backed securities, is likely to stick with us through early next year, say Fed watchers.
The Fed’s purview is monetary policy, not fiscal policy. At the end of a two-day meeting of the Federal Open Market Committee, the Fed asserted in a statement that fiscal policy is restraining economic growth, referring to federal spending cuts and the ongoing stalemate on the federal budget. It said the economy continued to expand at a moderate pace and that the availability of jobs continued to improve.
Yes, but. There’s a watchword that markets efficiently act on all the information available at the time. The qualifier that seems to go unnoticed is that not all of the information is accurate. There’s always garbage information in the mix, as well as convenient omissions.
For instance, the growth of the job market has been selective, bracketed by increases in job numbers at the top and bottom rungs, but the middle is hollowed-out, and it’s the middle class that’s expected to make the consumer purchases that fuel 70 percent this country’s economic growth (that itself is an issue for another time). To buy more, they need jobs, and at least one recent study indicates that those jobs haven’t come back since the 2008 financial crisis.
Monetary policy can’t touch that. The Fed can print all the money it wants, but if fiscal policy doesn’t allocate it properly, it’s a waste of paper.
We’ve seen calls for the return of a higher rate of inflation as a remedy. In recent months, big retailers such as Wal-Mart, Rent-A-Center and various regional grocery chains have suggested that inflation would drive more new customers to their doors.
Well, there’s a convenient omission here. Cuts in food stamp benefits, which went into effect last week, have these same retailers bracing for a loss of an existing customer base, so it’s probably no wonder that they’re looking for That Old Time Inflation to bring in new middle class customers. Does this sound like a zero-sum game?
Inflation used to be the homeowner’s friend, back in the buy-and-stay-in-the-house days when there was far less global economic competition, and the average middle class person’s station in life would likely improve over the years, all the more likely if they owned rather than rented (due to employers’ regarding homeowners as more stable than renters), but rising wages would make it easier to make the mortgage payments over time, and increasing prices would boost the long-term value of a house.
Circumstances have changed. Here’s the new reality: The seed corn of home equity has been eaten away. It’s hard to stimulate job growth in a time of global labor oversupply. Cheap credit doesn’t yield much in an era of cheap capital. And growth that doesn’t pay for itself is not real growth.
