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Stimulus

The Promise of Prosperity

By | 2016, Money Moxie, Newsletter, Viewpoint | No Comments

Americans want a strong country and growing economy. That much we agree on. Of all the promises we heard this election year, none may be more difficult to keep than the commitment to boost growth up to levels last seen decades ago.

Since 2009, the U.S. economy has increased at a rate of 2 percent. Many countries envy that number, but Americans expect more. Our increases were twice as big 20 years ago.

In all of human history I know of no other time with such miraculous growth as post World War II. We have come to accept boom times as normal.

From 1948 to 1973 the average economic output of an American worker doubled. That productivity trend continued until the early 2000s when it suddenly slowed.

prosperity

Consumers Carried the Economy
The “Great Recession” of 2008-2009 complicated things further by drastically altering Americans’ perception of stability and diminishing their tolerance for government debt.

This led to tighter limits on government spending, which has been a huge drag on economic growth. The federal government has cut spending 4 of the last 5 years. This is good short-term because it reduces debt. The long-term impact is less certain.

How much can our economy grow when the government is cutting spending? Who picks up the slack? Businesses have been hesitant to reinvest large amounts in long-term projects. So the responsibility for economic growth has fallen on the shoulders of the U.S. consumer.

Politicians Turned to Spending
Today, politicians and economists are calling for stimulus. What form this takes is yet to be seen, but the popularity of such an idea is rising. Both presidential candidates announced plans to increase government spending to improve infrastructure and stimulate an atmosphere of growth. Donald Trump plans to increase spending by $500 billion. (Hillary Clinton proposed bumping it up by $275 billion.)

Will Stimulus Work?
The answer for decades following the Great Depression was “yes.” The theory is that for every dollar the government spends it can boost the economy by several dollars—creating more wealth than was spent as the dollars circulate through the country.

It fell out of favor in the 1980s and 1990s. Now it’s back.

If stimulus is going to work then it should be concentrated on “fiscal multipliers.” These are the best places and they are often described as levers that can be pulled to actually create growth in the economy.

For stimulus to work it should be focused on the most effective area: infrastructure. Why?
1. Immediate creation of jobs
2. Jump in demand for construction materials
3. Greater efficiency for the entire economy
4. Investment in the future of America

Our bridges, airports, and freeway systems are in need of repair. Our electric grid is outdated and vulnerable as well. Technological advancements have redefined living. It may be time to apply some innovative American ingenuity to our infrastructure.

If there ever was a time that Americans could benefit from this stimulus it would be following a lack of spending—a situation we now find ourselves in.

 

*Research by SFS. Data from the Federal Reserve Bank of St Louis. Past performance does not guarantee future results.

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The Federal Reserve Will Soon End its Easy Money Stimulus

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

When Lehman Brothers collapsed in 2008, all lending essential stopped. The U.S. Federal Reserve (Fed) feared that all five investment banks in this country would cease to exist. No one fully understood the financial calamity coming, but we were beginning to feel what the worst recession in 80 years would be like.

The Fed acted to stop the financial infrastructure from imploding. It believed cushioning the blow was necessary to help all Americans. It started the Troubled Asset Relief Program (TARP). It added to that program over the years with Quantitative Easing (QE) one, two, and three.

Recent years may not have felt like easy money to us, but there is likely no organization more profitable in recent years than the Fed.

The Fed doesn’t literally print money (a responsibility of the U.S. Treasury). It doesn’t have to. Money is created electronically by the Fed and infused into the financial system through open market actions. Its effectiveness is questionable. Its impact is global. And at some time soon it may be ending.

What Is the Fed’s Impact?

Currently, the Fed is spending roughly $85 billion each month to buy treasury bonds in order to keep long term interest rates at historically low levels. The goal is to encourage risk taking. The Fed wants banks to lend, businesses to hire, and consumers to borrow.

If you have purchased a home, refinanced a loan, or bought a car with debt, then you have benefited from these unprecedented efforts of the Fed.

All this money the Fed is creating seems to be working to a small degree. The U.S. stock market* is on track for its fourth positive year in the last five. If you have invested in stocks or bonds consistently during this time, you have probably benefited from the Fed’s actions. Experts have been debating how well the Fed’s historic efforts have worked. One theory is that each time the Fed spends, it has less positive impact than the previous effort. This would explain the lackluster growth in the economy.

Why Is the Fed Still Involved?

Simply stated, the benefits still appear to outweigh the risks.

Low interest rates are meant to be enablers for businesses and consumers to increase borrowing. If the debt gets out of hand, then we will be facing similar problems to those that got us into this mess.

If spending and demand increase too much, then inflation could rise to levels considered too high for a developed economy (greater than 4 percent). At that point, the Fed will have to react to try to slow down the economy even if it means job losses.

At this point, official inflation is tame and private debt levels do not appear inflated like in 2007.

As long as the risks appear low and unemployment is above 7 percent, the Fed is likely to keep spending.

What Will Happen When the Fed Slows Stimulus?

Interest rates will rise from the unusual levels where they currently are to a more natural rate determined by investors. We experienced a taste of what this will feel like this spring and summer. Rates on the 10 year treasury almost doubled in just a few months. Investors saw an increase in volatility.

Where Is the Silver Lining?

Don’t fight the Fed is a common phrase for investors. The Fed is powerful and it is working for what it believes is best for Americans. It plans to cut stimulus only after it determines that the U.S. economy is strong. If rates rise that should bring better yields for savers.

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