In today’s economic landscape, statements from financial leaders often stir debate. Recently, Federal Reserve Chair Janet Yellen asserted that the economy is in good shape. Yet, one must wonder: does her perspective align with the reality many face?
On the surface, a narrow interpretation of government statistics might support her claims. With the unemployment rate at 4.5 percent—considered indicative of full employment—and inflation hovering around the Fed’s target of 2 percent, it seems there are reasons for optimism. However, these figures tell only part of the story.
Yellen believes it’s time to shift monetary policy, advocating for a tightening approach. While she provided an automotive analogy during her talk at the University of Michigan, suggesting a transition from “pressing down on the gas pedal” to merely allowing the economy to “coast,” the clarity of her message is questionable. Yellen’s reference to staying ahead of some economic curve remains vague, particularly regarding inflation.
In analyzing the monetary supply, one could argue that the Fed has lagged behind its goals since the massive expansion of its balance sheet between 2008 and 2014—from $905 billion to $4.5 trillion—a staggering almost 400 percent increase. Yet, who are we to critique?
Economic Flatline
Despite Yellen’s confidence in the economy, her optimism may not be justified. The Fed’s plans to shrink its balance sheet later this year raise concerns. New York Fed President William Dudley proposes to stop reinvesting maturing principal—a plan that promises to be fraught with challenges, as the economy and financial markets are likely ill-equipped for such a shift.
While the unemployment figures may seem promising, a broader view reveals stagnant growth. As of the fourth quarter of 2016, GDP expanded at a meager 2.1 percent, and forecasts from the Atlanta Fed’s GDPNow model indicated a mere 0.6 percent growth for the first quarter of 2017. This level of growth is hardly indicative of a healthy economy; rather, it suggests an unfortunate economic flatline, unable to alleviate the burdens of substantial public and private debt.
Hell To Pay
President Trump is certainly not satisfied with a 0.6 percent growth rate. He aims for 4 percent and has openly promised to deliver such results. However, transforming promises into reality requires more than rhetoric; it demands hard work, persistence, and often, a bit of fortune.
Trump’s commitment to achieving 4 percent growth appears overly optimistic, particularly since it’s been over 13 years since the U.S. economy experienced even a single year at that level. The current landscape is mired in high levels of debt and persistent intervention, making such growth challenging to achieve.
Moreover, the Fed’s strategies—whether increasing interest rates or reducing its balance sheet—might inadvertently undermine Trump’s objectives. Higher borrowing costs typically lead to reduced spending, which does not bode well for economic growth.
In truth, the necessity for reduced borrowing and spending is becoming apparent. An economy characterized by tightening credit, falling asset prices, and even the potential for businesses to fail or governments to default could be what is needed to restore balance. Ultimately, these painful adjustments are the necessary responses to an economy that has drifted far from equilibrium, where even basic consumer goals seem increasingly unattainable.
There is undoubtedly a price to pay for a century of unchecked financial practices. As we confront these realities, it’s clear that the challenges ahead are significant and will require careful navigation.
Sincerely,
MN Gordon
for Economic Prism
