Many will blame the Thursday’s big market drop on Europe. They’d be right, however the weakness before the Europe drop and the persistent over all weakness in the economy can be attributed to two things. Bad Federal Reserve policy and terrible fiscal policy from the President.
David Malpass <a href=”http://online.wsj.com/article/SB10001424053111903341404576483952207342740.html?mod=WSJ_Opinion_LEFTTopOpinion” target=”_blank”>thinks</a> we need higher interest rates and a stronger dollar. Last March, I <a href=”http://pointsandfigures.com/2011/03/22/why-i-am-for-a-strong-dollar/” target=”_blank”>advocated</a> for a strong dollar. The government’s policies destroyed people in the US that were savers. Prolonged 0% interest rates create opportunity costs elsewhere in the economy. We have seen commodities spike and dollar depreciation-along with positive effects like corporates being able to re-finance their debt at cheap rates. Senior citizens and people on fixed incomes have been harpooned by Federal Reserve policy.
Interest rates are a price for money. They aren’t a regulation or a law. Once the Fed sets an interest rate all markets adjust. Incentives change given a rate of interest. Move rates up, the price for the currency goes up. Move rates down, and you depress the value of the currency.
Too many countries are trying to use interest rate policy to manage their economy. The Japanese are the prime example, but yesterday Switzerland tried to stem the flight to quality market moves by cutting its interest rates to 0. Why not adjust fiscal policy to encourage growth?
Government policy is truly another matter. Eddie Lazear has a <a href=”http://online.wsj.com/article/SB10001424053111903366504576486102518375150.html?mod=WSJ_Opinion_LEFTTopOpinion” target=”_blank”>nice article</a> on how it truly effects the little guy today. Virtually all countries that are in trouble have elected to go with Keynesian stimulus. Keynes’ economic policies <a href=”http://pointsandfigures.com/2011/07/30/this-chart-says-it-all/” target=”_blank”>GDP growth</a> kills the middle class. What we need is aggressive GDP growth.
Obama’s policies have killed private sector GDP growth, the primary driver of the economy. The other primary driver is consumer spending. Government’s multiplier effect is 0.
<blockquote>”During the debt-ceiling debate, President Obama characterised his push for higher taxes and less aggressive budget cuts as being helpful to the middle class. The claim was that failing to raise taxes on high-income earners would place a disproportionate share of the pain on the rest. But it is our record-high government spending, not the failure to raise taxes on the rich, that is the typical American’s largest long-term problem.
Workers do well only when the economy grows at a healthy and consistent pace. The biggest threat to long-term economic growth is government growth of the magnitude that characterised the past two years and that is forecast for our future.
Our current problems are not a result of acts of nature. They stem from policy choices that dramatically increased the size of the government. In the past two years, the federal budget has grown by a whopping 16%. Importantly, growth in agency budgets other than defence exceeded that in defence, despite the surge in Afghanistan. The budget for Health and Human Services, for example, home to Medicare and Medicaid, rose a hefty 22%, as compared with 12% for defence.” </blockquote>
Policy has consequences as well. The current tack that we are on, aggressive Keynesian stimulus, bailing out poor performing companies, increasing the amount of regulation, and increasing the size and scope of government via programs like Obamacare and Dodd-Frank are detrimental to GDP growth.
You can spin it anyway you want, but the data point to really bad policy-both at the Federal Reserve and from the Obama administration. The Fed is out of bullets, and Obama is out of good ideas.