Way back when the economy stumbled and fell to its knees (2007-2008), the Federal Reserve moved to lower interest rates to stimulate economic activity in the private sector.
When low interest rates didn’t effectively stimulate the private sector of the economy, the Fed adopted a process called Quantitative Easing, plus low interest rates.
Now that the private economy has recovered (somewhat or fully, depending on which numbers you use) we have ended Quantitative Easing but we continue to maintain ultra-low interest rates. It would seem we are still trying to stimulate the private sector.
Has the economy recovered or not? There are some who believe the monetary policies of the last several years have had a negative impact on the recovery because we have never addressed the fiscal issues that led to the recession.
Europe has just embarked on a course of quantitative easing because its low interest rate policy has failed to lift its various economies out of recession. Japan has also pursued a policy of ultra-low interest rates and quantitative easing and they, too, remain in a recession. Only China seems to be demonstrating positive economic growth, though the rate of its growth is slowing. The developed economies are struggling and utilizing only monetary policy to stimulate economic growth.
Monetary policies, whether in the United States, Europe or Japan have effectively raised the overall prices of equity, meaning stock and real estate. Europe’s venture into quantitative easing will again likely spur the stock markets in the United States and Europe to rise even more.
It is also likely to lower our interest rates in the bond markets even further. When central banks provide more money to their economies, it has to go somewhere and so far it has not gone into expanding economic activity, GDP growth, increased employment or rising wages. It has drifted into higher equity prices, bank reserves and higher bond prices (coupled with lower interest rates).
There seems to be precious little incentive for the private sector to invest and expand despite ultra-low interest rates. Further, retired investors seeking current returns have had to turn to stocks to find respectable yields to supplement their retirement incomes. The central bankers have forced investors to take on more risk in order to maintain their lifestyles.
The pundits are talking about when and even if the Federal Reserve will begin raising interest rates. So far it is all talk and no action. While retirees wait for a return to higher interest rate levels, the conversation continues to be about why the Fed cannot raise rates now.
A half century ago, I plotted interest rates from the 1600s until 1965 and noticed a fifty year cycle in rates. If those cycles are still in place, interest rates will remain low until 2030, 15 years from now. What this means for me is that I will have to remain a stock investor to have my 401(k) generate sufficient numbers to offset my required minimum distribution. Retired folks are going to have to remain in the equity markets to earn respectable returns on their savings. The rates have remained too low for too long and might just lead to other economic problems.
Ultimately, the “fix” for the economy lies in fiscal policy. We have heroically protected the established and lobbying companies that have remained in control even after nearly sinking the entire economy just eight years ago. What will change the calculus and allow things to get moving again? Here is my short list:
- Repeal the tax on foreign earnings and allow companies to repatriate their earnings without any federal or state income taxes.
- Lower corporate tax rates (we now have the highest rates in the world) and remove all the tax loopholes. Lower rates and simplify returns so companies can concentrate on their businesses and not tax management strategies.
- End corporate welfare. (Incidentally, depletion allowances and depreciation are not corporate welfare.)
- Everything useful does not have to flow through Washington. Simplify personal tax returns by making the rates lower and removing the credits and loopholes. Remember, many businesses file their tax returns as individuals, not corporations.
- Place a five year moratorium on further regulation and start to dismantle lawmaking by regulation. Note: we haven’t fully implemented the last batch of major laws, including Obamacare and the Dodd-Frank financial regulation, even though they were passed years ago. The bureaucrats cannot agree on what the laws mean, let alone the companies they supposedly regulate.
- Make banking regulation easier by returning to Glass Steagall, separating depository lending banks from investment banks.
Of course, I am not holding my breath waiting for these or any other policies to promote a simpler, easier and faster economy. But at least you now know what I am looking for as we approach the next election.
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