As discussed in Friday’s #Macroview, stimulus, mainly when it comes from debt, does not create organic economic growth. In the second part of this analysis, we delve into why Powell is wrong when he says more stimulus will solve the employment problem.
Let’s start with the two most essential snippets from Fed Chair Jerome Powell’s speech last week:
“Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.”
“It will require a society-wide commitment, with contributions from across government and the private sector.”
I agree with his first point. If you account for those no longer counted as part of the labor force, the real unemployment rate (more commonly known as the U-6 rate) is near 10%.
However, where I disagree, as we exposed in part one of this discussion, monetary and fiscal supports when they are non-productive, do not create the confidence required for economic growth.
The Confidence Problem
To understand why confidence is necessary, we need to go back to 2010 when then-Fed Chairman Ben Bernanke revealed the Fed’s “Third Mandate.” To wit:
“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
For the Fed, “confidence” is the key to economic growth, given the economy is roughly 70% comprised of personal consumption. Unfortunately, the Fed believed inflating asset prices would “trickle-down” to the rest of the economy. Such would lead to more consumption and economic growth.
That didn’t occur.