The following is an excerpt from this week's "The Effective Investor" report:
"(The title for this blog posting) could easily be the title and the rationale for what is widely recognized as a grand experiment in monetary and fiscal policy.
On the monetary policy side, central banks around the world are engaged in cheap money regimes and their corollary, financial repression, in an effort to avert an economic contraction and its corollary: social unrest. On the fiscal side, most governments embrace a zero tolerance for more debt-provided spending and are engaged in austerity programs of varying sorts in the hope of bringing down their aggregate debts levels*.
In the end, both experiments must produce the desired result of a sustainable – and organically driven by the private sector – growth phase. In such a phase, government programs can move toward normality as the private sector takes over and is capable of sustaining the economy without massive government intervention. But will we get there?
Since the 1930’s, the operative way to achieve this goal of a (largely) private sector driven organically sustainable growth phase was when monetary and fiscal policy worked in tandem (in the same direction) with one another via easing. This was known as, of course, Keynesianism. For a variety reasons, however, that approach is not possible today as fiscal and monetary policy are pulling in the opposite direction.
So, central banks have taken upon themselves (via their mandates and for other economic – and political? – reasons) to help avoid what will be a near certain, pro cyclical economic and societal death trap as a result of a global economic decline. But will monetary policy alone (no matter how extraordinary the measures might be – as in QE to infinity) do the job?
There is no certainty that what central banks and governments are doing will work. Nor is there any certainty that the grand experiment going on the second largest and vitally important global economy (that being China), where managing the economic and cultural migration of its population to avoid social unrest via fixed capital investments transitioning to a more balanced (as in more domestic demand) economy, will work without major disruptions in the process.
Taken together, along with the myriad of complicating and interconnecting and dynamic factors on the geo political and business front, it’s hard not to wonder how all this is going to work out in the end.
Put simply, the grand experiment must result in an organically (non governmental driven) sustainable growth economic expansion (expansion, not recovery) – one that feeds upon itself and produces that wondrous experience of a virtuous circle of more private sector spending anchored in higher wages and, therefrom, higher corporate earnings. At that point, a reduction in government intervention can begin, primarily via central banks rebalancing their balance sheets. From that, financial repression will begin to wind down and interest rates will gravitate toward their more normal and natural levels. If not, then who knows what the public policy options are in a zero bound interest rate/zero tolerance for public debt environment?
*Some would argue that many austerity driven programs are designed to change the social compact between government and its citizens. This is a topic for another report at a later date."
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