In the realm of economics, the term ‘stimulus’ signifies any action or event that provokes a specific response. For instance, an alarm clock ringing might prompt an individual to wake up, or a sudden gut punch could instigate a gasp for air.
<p>Stimuli can manifest in various forms. Sometimes it's a stick, warning you to follow a path to avoid negative consequences, while at other times, it's a carrot, offering rewards for desirable actions.</p>
<p>Certain stimuli can elicit immediate reactions. Take caffeine, for example. A cup of coffee may momentarily stave off sleepiness, but once its effects dissipate, additional coffee is needed to maintain alertness.</p>
<p>Former baseball player Jose Canseco provides a unique perspective on the topic of stimulus. His insights are not derived from formal instruction but through his personal experiences, which he chronicled in his memoir.</p>
<p>In his 2006 book, *Juiced: Wild Times, Rampant ‘Roids, Smash Hits, and How Baseball Got Big*, Canseco discusses his experiences with performance-enhancing drugs that purportedly stimulated his baseball career. Recall the baseball stars of the late 1990s, their impressive statistics and transformed physiques garnering attention.</p>
<h3><strong>DOW 40,000!</strong></h3>
<p>Apparently, Canseco’s experimental insights make him a self-proclaimed expert on various forms of stimulus, including monetary policy. In fact, he has voiced his desire for President-elect Donald Trump to appoint him as Chairman of the Federal Reserve.</p>
<p>As of Thursday's market close, the DOW was teetering on the brink of 20,000. Historical indicators suggest that this market is significantly overvalued. However, Canseco boldly claims that under his leadership, the DOW could surge to 40,000 within four years. On Monday, he tweeted at Trump:</p>
<p>“Hey brother @realDonaldTrump give me control of the Fed and we will make the economy great again. DOW at 40k in 4 Years. #Yeswecanseco.”</p>
<p>Honestly, it’s puzzling to believe that achieving a DOW of 40,000 in four years would equate to a revitalized economy. Monetary stimulus has inflated the market to levels that lack a clear relationship with actual economic conditions. Meanwhile, the reality is that Wall Street is thriving while Main Street struggles.</p>
<p>To achieve Canseco’s lofty DOW target would require an unprecedented increase in monetary stimulus. Given the radical policies and the resulting market distortions we’ve witnessed over the past eight years to reach the current DOW of 20,000, it’s hard to believe that a DOW of 40,000 could genuinely enhance the economy's health.</p>
<h3><strong>Has the Fed Turned “Hawkish?”</strong></h3>
<p>Canseco isn’t alone in his unorthodox theories. Numerous seasoned economists have adopted similar perspectives, mistakenly believing that a perpetually rising stock market is inherently beneficial for economic health.</p>
<p>This belief often hinges on the concept known as the “wealth effect." In essence, it suggests that as asset values ascend, individuals tend to spend more. As investment portfolios gain value, consumers feel more secure financially and are more likely to make purchases, even if they are buying frivolous items from far-off places. This uptick in consumer spending is thought to invigorate the economy.</p>
<p>However, the data from the last eight years paints a different picture. While the DOW has soared by 160 percent, the GDP has only seen a rise of 30 percent.</p>
<p>This week, it was revealed that the Fed will commence <a onclick="javascript:pageTracker._trackPageview('/outgoing/www.federalreserve.gov/newsevents/press/monetary/20161214a.htm');" href="http://www.federalreserve.gov/newsevents/press/monetary/20161214a.htm">gradual increases</a> to the federal funds rate. On Wednesday, Fed Chair Janet Yellen announced a quarter-point hike to a range of 0.5 to 0.75 percent. In the aftermath, many economists speculated that the Fed has adopted a somewhat <a onclick="javascript:pageTracker._trackPageview('/outgoing/blogs.wsj.com/economics/2016/12/14/economists-react-to-the-federal-reserve-a-bit-hawkish/');" href="http://blogs.wsj.com/economics/2016/12/14/economists-react-to-the-federal-reserve-a-bit-hawkish/">“hawkish” stance.</a></p>
<p>One must wonder about the perspective of such economists. If the Fed is now considered hawkish, then a canary must be the size of a Thanksgiving turkey.</p>
<p>Let’s clarify: despite the recent increase and the potential for additional hikes in 2017, a federal funds rate of 0.75 percent remains exceedingly accommodative. The Fed is still far from hawkish.</p>
<p>As we move forward into a landscape where Donald Trump is likely to advocate for fiscal stimulus, the Federal Reserve will continue to maintain its course on monetary stimulus. However, while Canseco's dreams of a DOW 40,000 shadow the hopes of many, the anticipated wealth effect from the Fed's actions remains unlikely to materialize.</p>
<p>Sincerely,</p>
<p><a href="https://economicprism.com/category/mn-gordon/">MN Gordon</a><br/>for Economic Prism</p>
<p><a href="https://economicprism.com/">Return from Has the Fed Turned “Hawkish?” to Economic Prism</a></p>