The Fed's Mission: A Rocket Launch From Jupiter - Bloomberg View

The Fed's Mission: A Rocket Launch From Jupiter - Bloomberg View



nkocherlako1@bloomberg.net
https://www.bloomberg.com/view/articles/2016-09-23/the-fed-s-mission-a-rocket-launch-from-jupiter

Dear Narayana,

With respect to the above-linked article, as always, there are many possible views, considerations and unintended consequences.

Let me posit one for consideration:

1. Assume the real problem in the US economy is lack of education (to wit, consider the reported record number of unfilled job openings.

2. Next, assume part of the broadly acknowledged problem is lack of education. Record numbers of people who, even when they are given a high school diploma, can't read and write (or do math).

3. Recognize that low interest rates are decreasing the returns on public pensions (state and local government workers); and, that it is hard to adjust benefits. The only avenue is increased taxes.

4. And, in California at least, most additional revenue for many years has been going to shore up public employee pension and health plans. The money has not been there to support higher education and especially junior colleges.

Thus, with the regulatory environment of the banks starving small and medium-sized businesses of funding, so fewer jobs are created here to absorb the perhaps less or unskilled, what is the situation?

Your article points to the advantages of low rates to possible businesses (but, obviously not small and medium-sized businesses (regulatory constraints)) and thus, the US is losing more businesses than it is creating - a fact not all that broadly discussed.

So now we get down to the unintended consequences. I don't know if the low rates, starving of educational systems will have a balancing act favoring the outcome of low rates. I just don't know. But, clearly, underfunded pension plans and the need to raise taxes (didn't Chicago recently do it three times) is an ill harbinger.

I now spend most of my time in Southern Europe. Here governments are happy, in my case, with a 23% VAT tax. What is one of the results? Stiffled demand. When European governments bemoan inadequate domestic demand, they ignore how they kill demand. Thus, export oriented growth or low wage jobs in hospitality here in Portugal.

I'd argue that Portugal has crossed the tax Rubicon and, based on a business a friend recently started, its failure is baked in by inadequate local demand. This isn't the exact situation in the US as domestic demand is strong.

However, the crossing of the interest rate Rubicon by keeping rates low for too long may well have very serious consequences in further starving education to support public retirees. An issue ignored in the above article. To me it is an open question that should be paired with the idea of supporting businesses.

One can add as a final codicil that there are also tax and regulatory policies that are highly adverse to any but the latest tech businesses and even these, like Apple, with funds offshore are investing heavily outside the US (here I'm thinking of Apple's recent 1 billion dollar R&D investment in China). 

Cheers