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Will Yellen Stop Putting Robitussin On The Economy? PDF Print E-mail

Image During his 1999 stand up routine, Bigger and Black, Chris Rock described how regardless of his illness as a child, his father "put some Robitussin to it":

When I was kid we had no insurance ... You had to be near death to see the doctor. You had to be way past Robitussin. That's all we had when I was a kid ... Robitussin. No matter what you've got, Robitussin had better handle it. "Daddy I've got asthma. Robittussin! I've got cancer. Robitussin! Daddy I broke my leg, Robitussin!"

This reminds me of Fed Chairwoman's monetary policy. Regardless of the malady -- high unemployment, an underperforming stock market, stagnant economic growth -- the Fed has applied Robitussin, i.e., record low interest rates. This has been going on for eight years now. The Financial Crisis of 2008/2009 was so devastating that the Fed had to put liquidity into the system to keep the economy from free falling. Former Fed Chairman Ben Bernanke's strategy was to create a wealth effect by pumping up asset prices via low rates.

Yellen maintained Bernanke's stimulus efforts, yet it hasn't helped the economy. The Fed uses personal consumption expenditures, excluding food and energy ("PCE"), as the metric to measure inflation. Its target is 2%. PCE has not grown at 2% annually since the Financial Crisis. The closest it came was 1.9% in 2012; it grew 1.7% in 2016. Despite dismal growth in PCE the Fed has continued to apply Robitussin.

Financial Markets Have Benefited ...

The Fed has successfully created a wealth effect. Real estate prices in urban areas have been robust. Financial markets have achieved record highs year after year, despite less than stellar corporate earnings growth. The S&P 500 (NYSEARCA:SPY) has risen 17% Y/Y and has been up 11% since the end of October. The popular narrative was that since Donald Trump was so unpredictable, the financial markets were going to crater if he got elected. Nothing has been further from the truth. Expected wealth effects from proposed infrastructure investing and tax cuts have driven financial markets even higher under President Trump.

The question remains, "For whose benefit has the wealth effect inured to?" For those who own assets -- real estate developers, hedge fund managers, private equity firms, et. al. -- Fed policy has been beneficial. However, the holders of such assets make up a small segment of the population; thus, the Fed's policies have inured to a small segment of society.

According to mic.com economic growth typically inured to the bottom 90% of income distribution. That has not happened during or after the Financial Crisis:

In the period of economic expansion lasting from the end of the recession in 2009 until 2012, average incomes for the bottom 90% of Americans actually shrank, while income growth for the top 10% soared. The data in the chart cuts off at 2012, but, as Matt Yglesias noted, "unless there's a massive break with the previous three expansions we will continue to have an economy where the typical family's living standards grow much more slowly than GDP growth per se would allow."

Income inequality and wealth inequality have now come into focus. I am of the opinion that they have been exacerbated by Fed policy. Furthermore, if the economy turns down those who have benefited most from the Fed's wealth effect will hoard their cash instead of spending it. That's not good for long-term growth in PCE.

Pursuant to the economy, it's time that the Fed stop "putting Robitussin on it." It hasn't worked in nearly a decade and it likely will not work going forward. Some believe Yellen will hike rates Wednesday. It could mark the beginning of the end of a major Fed policy error.

 

On Shock Exchange 

With the critically acclaimed, Shock Exchange: How Inner-City Kids From Brooklyn Predicted The Great Recession And The Pain Ahead, author Ralph W. Baker, Jr. predicted the current global economic slow down, the demise of China, emerging markets and the pending stock market crash.

Where to Buy:

"Shock Exchange" is available electronically through Barnes & Noble (NOOK), Amazon (Kindle), iTunes, etc. The print version is available through the following retailers and bookstores:  

Print Version: 

Amazon http://www.amazon.com/

Barnes & Noble online http://www.barnesandnoble.com/

Hampden-Sydney College Bookstore: http://cougar.hsc.edu/cgi-bin/main_inv.exe , item number: 38561. Or call Jason Huskey at 434-223-6117.   

 

 

 

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