I’ve been predicting the no-change decision for months!
It was pretty obvious, but that’s because I can see that ZIRP and QE are killing the economy.
The labor market is still relatively weak, regardless of what the seriously misleading unemployment rate statistic tries to tell us. Job openings are at record highs (companies can’t find the right talent) while the percentage of the population employed is at levels last seen nearly 40 years ago. The three-month moving average for retail sales is at a level only seen during the Great Recession. Second quarter revenues for companies in the S&P 500 were down 3.4% year-over-year. Second quarter earnings were also down year-over-year.
So what does this mean?
Nearly a decade of ZIRP (Zero Interest Rate Policy) and trillions in Quantitative Easing and still, the economy can’t get off what the Fed believes is life support!
Why? Because while playing in all their models they miss the big picture!
Economists often make understanding the economy unnecessarily complicated. Part of it is reasonable in that this stuff can be complicated and it takes a lot of time and effort to communicate these topics in a way that doesn’t use terminology that only “big brained” economists understand. They’re busy and most just aren’t interested in putting in the time. Part of it is probably job security – we all like to give the impression that what we do is really difficult!
An economy grows when good ideas are able to get funding, find talented people to work on them and are able to operate in an environment that is conducive to their success; that means limited laws, regulations, and a tax code that are all easy to understand and not costly to follow. It is that simple.
All this QE and ZIRP have kept interest rates super low. That forces people to put their money into riskier investments than they’d prefer. By definition, riskier investments have to generate higher rates of return to compensate for their greater level of risk. High levels of risk are also associated with ideas that probably shouldn’t get funding, but manage to get it by promising really high rates of return; sometimes really high returns…I’m sure you’ve heard of the hockey stick effect. If investors are pushed into more “higher risk/higher potential return” investments than they’d normally like, that means more of these bad ideas get funding.
In an ideal world only good ideas get funded because when bad ideas get funded, investors lose their money and resources like people, time and raw materials get wasted. There’s a net loss to society. (I’m simplifying here a bit for the sake of clear communication as some degree of bad ideas is a relative good because they serve as a warning and provide a place of learning what not to do or avoid).
Putting all that together, extra low interest rates mean investors are pushed into investing in more higher risk investments which means more bad ideas get funded than would otherwise be the case, so the economy experiences a higher failure rate than would normally be the case. That means more investors lose their money and more resources get wasted, draining the economy. Add in that the U.S. economy is getting more and more complicated with respect to legislation, regulation and a tax code that even the IRS doesn’t understand. Even great ideas struggle under the burden of trying to jump through all those extra governmental hoops that just make it that much harder to be successful.
Where do we go from here?
With respect to interest rates, there is no easy solution. We need to normalize, but today that is a bit like dreaming of a bright future for a 17-year girl who’s 8 months pregnant, dropped out of school 4 years ago, ran away from home, and has covered her body covered with skeleton tattoos. It’s possible – but it is going to take a hell of a lot to get from here to there! That being said, reducing the regulatory, legislative and tax complexity would go along way towards helping all businesses, whether they be a great ideas, so-so, or even marginal be more likely to succeed, which means more jobs and more money available to invest in the next idea.