Stop Yelling At Yellin
2015 has ended and the Federal Reserve has finally acted after 24 months of “Taper Tantrums” and uncertainty. Thanks to the delay, we are beginning to feel the effects of something that scares every economist: a lack of economic activity that is reflected by a lack of “Aggregate Demand.” Aggregate demand simply means spending: by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment.
By failing to act earlier, rates are rising so late in the “New Normal Business Cycle” that investment markets are a mess and the world looks like it is coming unhinged. Now everyone is looking to the world’s central banks to solve all the fiscal problems. So, if the Fed no longer is driving the economic bus, how in the world do we get out of this deflationary cycle? Here is a novel thought – FISCAL POLICY. Why is Fiscal Policy needed? Fiscal Policy is the most effective way of dealing with deflation (AKA aggregate demand).
At the moment, the biggest problem facing business is a lack of consumer demand. They would rather take their valuable capital and buy back their own stock (a whole other problem!).
How about homeowners? Well after the financial meltdown, consumers are not going to be running to the bank anytime soon to tap into what is left in their home equity.
While we do not like debt and call ourselves fiscal conservatives, Congress had better wake up soon or things are going to get ugly. They need to stop obsessing about the deficit and shift gears into finding ways to increase consumption and investment (AKA aggregate demand).
So now Japan as a major trading partner to the U.S. has gone to negative interest rates. All we can say is let the Currency Wars begin.
For the remainder of this year, we will be looking for signs of aggregate demand. Until policy makers wake up and deal with this problem, we can expect a very difficult economic environment in the coming months.