Watching everyone holding their breath waiting to hear what Janet Yellen was going to say in her speech in Jackson Hole on Friday reminded me of how, when I entered this business 45 years ago, investors would stand at the Dow Jones news wire every Thursday at 4:10 p.m. to see what the money supply was for the week, knowing that it would move the markets the next day. Ridiculous!
Truth is that many investors are focusing on the wrong things. Monetary policy has done enough and cannot do it alone anymore. It is a tool to be used as we near inflection points to boost the economy when needed, and to slow it down to curb inflationary pressures when it heats up. Changes in between are small and are an indication of the anticipated future direction of the economy and of Fed policy.
Talk that the Fed may raise rates in September is just plain premature in our opinion. The reasons are many. The economy and inflation are not heating up near any point of concern; second quarter GNP rose only 1.1 percent; inflation is still well beneath Fed targets; the global economy is still fragile, at best, although improving; corporations are not spending for a multitude of reasons, substituting labor for equipment, which is as good an explanation for falling productivity as you will see; no one has confidence that government will do the right things to promote longer term growth, stability and prosperity; the consumer cannot do it alone forever and the presidential election is in November.
We need to stop focusing on the Fed and monetary policy. The impediment to growth here and abroad is not monetary policy but the failure of governments everywhere to adapt and change their fiscal, tax, regulatory and social policies to stimulate growth to succeed in a globally competitive environment raising the standard of living for all. Finally, members of the Fed and other monetary authorities are pleading for governments to act.
Low interest rates everywhere mitigate the desire to save, which as we know, penalizes investment. And financial institutions that provide money to the economy are being penalized from abnormally low interest rates, which is negative in many key areas of the world. Would you like to be a bank or insurance company in Europe and Japan? We need to stop focusing on monetary policy as it can do no more. In fact, it may inflict harm on the global economies at this point in time.
Growth in employment and wages reflects improvement in consumer demand but more importantly it highlights the failure of corporations to invest in new plant, equipment and capacity, which is sorely needed as operating rates have risen so high that they have breached levels of efficiency. We need capital investment.
If governments enact policies simplifying the tax code, add research tax credits and offer accelerated depreciation on new capital investment, then employment gains and wage pressures will subside. Basically the Fed is getting a "false positive" reading on the strength of the economy by the strong gains in employment and hourly wages over the past year. Growth in employment is happening in large part due to a lack of capital investment. If I see this occurring, why don't they?
Since globalization is a fact of life, all governments, as well as all monetary authorities, must consider the impact of their actions on all other countries and work in concert such that all benefit rather than the strong getting stronger and the weak getting weaker.
Our leaders need to take a holistic view of policies with an understanding that there is no one size that fits all. I was dismayed by the comments and actions of Chairman Merkel in her visits with the heads of France, Italy and Balkan states last week. Clearly, she has not gotten the message of the Brexit vote. It's time that Germany lets other members of the ECB increase spending and lower taxes to stimulate growth even though it may increase deficits near term. She must remember that the real risks remain to the downside and to disinflationary pressures. Germany must stop disempowering the weak.