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@theMarket: Pushing on a String

By Bill SchmickiBerkshires Columnist



There was a time when an announcement of further easing from the Federal Reserve would have sent the markets soaring. This week the Fed promised more monetary stimulation and the markets finished flat to down.

Even more puzzling was gold's reaction to the announcement. The Fed is planning to purchase $85 billion a month in mortgage-backed securities, effectively pumping even more money into the economy. That money, unlike its previous bond-buying program, which bought long Treasury bonds and sold short ones, will involve printing new money. That is normally considered inflationary and yet gold prices barely budged. The next morning gold promptly fell $20 an ounce.

In a historic move, the Fed also tied interest rates to the jobless rate, promising that until unemployment came down to a 6.5 percent rate, it would keep interest rates at a near-zero level. The market's response was a big "so what." Investors do not believe that these latest Fed actions will do anything to reduce the number of Americans out of work or increase the growth rate of the economy.

The economy has been functioning under a historically low interest rate environment for some time. These low rates have been effective in avoiding another recession and keeping unemployment from rising further. But maintaining the status quo is not enough. In order to add jobs, the economy has to grow faster and that's not happening.

Ben Bernanke, the chairman of the Federal Reserve, has often said the central bank can do only so much. In order to accomplish a high-growth, low-unemployment economy, he maintains fiscal stimulus is absolutely necessary in tandem with lower rates. I agree.

But the Fiscal Cliff is not about cutting taxes and higher spending. It's about avoiding tax increases and cutting spending. Those actions seem to be at odds with what the central bankers are saying. The Republicans continue to insist that spending is the problem and that President Obama and the Democrats want tax cuts but little in spending cuts.

Republican Speaker of the House John Boehner, on Thursday, continued to insist "that the right direction is cutting spending and reducing debt."

How dense can one be? Has Boehner and the tea party bothered to look at how well that recipe hast worked in Europe over the last two years? It has been a disaster. It was also a disaster in Latin America throughout the 1980s. It flies in the face of what our central bankers are saying as well.

Boehner argued that if you include President Obama's new proposals to increase spending in areas that could stimulate the economy, then there would be practically no spending cuts at all in his Fiscal Cliff deal. Well, hurrah for the president.

I had hoped that if President Obama was re-elected, we could avoid the worst. The Bush tax cuts would be extended and the GOP's insistence during the election campaign (and up to and including yesterday) that we needed deep spending cuts would be moderated. So far the jury is out on my bet.

You may disagree, but I firmly believe that more, not less fiscal spending is absolutely imperative to jump starting the economy in tandem with the central bank's monetary policies at the present time. I will worry about the deficit after the economy is growing at a healthy rate and unemployment drops. At that point, I believe the explosion in tax revenues from a growing, full-employment economy will take care of the deficit, the debt and the Republican's propensity to angst. Until then, don't sweat the deficit, stay long and bet on avoiding the Fiscal Cliff.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

 

     

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