When Will The Economic Slowdown End: An Experienced Economist's View

 |  Includes: AGG, DIA, QQQ, SPY, UDN, UUP
by: John Lindauer

In the real world, the stock market has tanked, millions of people have lost their homes and jobs, numerous businesses have seen their profits suffer, and the number of business and personal bankruptcies, foreclosures, and layoffs continues to grow. Worse, our economy continues to recede further and further below its ever-increasing full employment level of output. Stocks will recovery when the economy recovers – until then they will churn along without going anywhere.

When will the stock market finally take off again?

Congress and the president often claim their actions, such as increasing or lowering federal spending and taxes, are needed to help achieve full employment and the restoration of business profits and tax collections. This is "common knowledge." It is also wrong.

The president and Congress can pass spending bills, even if there are few if any “shovel ready” projects. And hundreds of billions of spending or tax changes sounds like a lot, even when they tend to offset each other.

The problem is that hundreds of billions of federal spending increases or tax cuts, even when they are real, is relative chump change in a $16 trillion economy which today needs at least another $4 trillion of consumer and business spending to get the available labor force generally back to work.

Indeed, in the real world even more hundreds of billions of additional consumer and business spending is needed every year just to employ the increased labor force as more and more people reach working age and producers adopt new productivity-increasing technologies and practices.

In the real world the responsibility and tools for achieving full employment belong exclusively to our central bank, the Federal Reserve. The Fed is supposed to use its ability to instantly increase liquidity and spending when people and businesses don't spend enough to keep the economy fully employed. And it is supposed to instantly reduce liquidity when there is so much spending that inflation will otherwise result. Neither activity requires action by the congress or the president.

In the real world the Fed can pour money into the banks and economy in a matter of hours (hours, not days or weeks). Similarly the Fed can withdraw money from the banks and economy in hours (hours, not days or weeks). With these powers there is no excuse for the US economy ever having not enough jobs and profits due to a lack of consumer and business spending or having inflation from too much spending.

The role of the Fed is to see that the United States has enough spending - not too little spending so as to cause high levels of unemployment and unused industrial capacity nor too much spending so as to cause inflation. Today we surely have too little spending. And the political appointees at the Fed continue to dither about significantly increasing liquidity and spending.

Some non-expert pundits and Fed bureaucrats worry that the Fed might cause inflation if it responds to strongly to today’s grossly underperforming economy. Are their “fears” warranted - what if the Fed overshoots and increases the money supply or directly-funded spending too much? No problem. The Fed can go the other way within hours to remove any liquidity and spending levels that turn out to be excessive and unneeded.

So the talk today about the Fed being powerless or caught between the conflicting goals of full employment and inflation, and thus the need for more federal spending to "create jobs," is just amateurish punditing that would be emphatically denied by any knowledgeable macroeconomist with real world experience. Indeed, those who say we need a "jobs bill" or higher taxes on the rich or worry about more money today meaning inflation sometime in the future are tagging themselves as non-experts who understand neither the Fed’s powers nor how our banks, businesses, and consumers actually function in the real world.

In general, the reason we have today’s economic disaster is that the current batch of do-nothing Federal Reserve, FDIC, and Treasury decision makers are the equivalent of the president appointing chiropractors and dentists to the Supreme Court. Their lack of qualifications and ignorance of the real world is causing unnecessary losses of jobs and profits and that in turn is causing unnecessarily low tax collections that are causing government deficits.

We need some changes we can believe in and until we get them we will have the same old appointees doing the same old thing and getting the same old results. What we have today is a politically-inflicted and totally unnecessary tragedy for business, jobs, bankruptcies, foreclosures, and deficits. We need change we can believe in and that means new political appointees. Hopefully the next batch will be chosen for their macroeconomic expertise and real world experience instead of their political correctness.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.