Central banks are not — and never should be — the fixers of last resort
That is unfortunate because, with monetary and fiscal policies having no room for active support to economic activity, U.S. net exports should be the only sustainable source of stimulus to demand, output and employment creation.
Wall Street should know that better than anyone else.
The easy monetary policy — or, more precisely, the 10 years of monetary crisis management — has run its course. Excesses exemplified by the banks’ loanable funds of $1.5 trillion (as of Jan. 2) and the Fed’s monetary base (M0) of $3.4 trillion are huge structural aberrations. They are sequels to desperate measures of keeping afloat a profoundly destabilized U.S. economy. During the pre-crisis times in 2007, banks’ excess reserves fluctuated around monthly averages of $1.5 billion to $2 billion, while the monetary base remained at relatively stable levels around $800 billion.
Fiscal policy is an even more impaired instrument of demand management. The public sector deficit of 6 percent of GDP, and the gross public debt of $22 trillion (108 percent of GDP), are showing that the U.S. is in an acute phase of a worsening fiscal crisis.
With the primary budget deficits (budget balances before interest charges on public debt) of 2.5 percent, the U.S. public debt is on an unstoppable upward trend. Just to stop the spiraling debt, the primary budget must shift to steady and sustainable surpluses of 3 percent to 4 percent of GDP. A far cry indeed.
So, a rapidly improving trade balance is the only thing that could serve as a strong prop to U.S. economy.
That’s what Wall Street should be rooting for, instead of carping about Washington’s trade wars. Losing half-a-trillion dollar of purchasing power on an annual basis, America has been a victim — a trade war victim — of Chinese, European and Japanese mercantilist policies. Remember, those trade deficits are subtractions from the U.S. GDP. Over only the last five years, trade deficits have reduced the U.S. economic growth by a total of about 2 percentage points.
And the U.S. stands accused of waging a trade war!? So far, the rising U.S. trade deficits show that President Donald Trump’s administration has offered no defense to stop the huge erosion of America’s external accounts.
But there is one thing you can count on: With no progress at all on balancing the U.S. trade, and no room for additional fiscal stimuli, the markets, Congress and the White House will all gang up on the Federal Reserve to do the heavy lifting — put more money in to keep things going.
The Fed’s best line of defense is to stick to its mandate of price stability. To those arguing that there should be a flexible pursuit of that mandate, the Fed can easily explain that accelerating inflation is incompatible with high employment and faster economic growth.