Opinion

KOLB: The Federal Reserve Supplies The Obama-Trump Cocaine Economy

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Charles Kolb Deputy Assistant to George H.W. Bush

For the first time in a decade, the Federal Reserve lowered interest rates by a whopping 25 basis points on July 31. In non-Fed-speak, that means a quarter of a percentage point. The reduction doesn’t sound like much and had already been expected, or “priced in,” by Wall Street. This rate reduction has been called an “insurance cut,” a “risk-free vaccination” intended to prolong the decade of cheap money and, therefore, further sustain economic growth.

Recall that a mere nine months ago, the betting was that the Fed would increase rates twice in 2019. What happened?

President Trump considers today’s economy as perhaps the strongest ever: unemployment is at 3.7 percent (with the lowest unemployment figures ever recorded for African-Americans and Hispanics), and there is still reasonably solid growth. Nonetheless, there is mounting evidence that economic growth is slowing here and around the world. (RELATED: Stephen Moore: No, The Economy Isn’t Tanking, Stupid)

Car sales are tanking in China as the Chinese government continues to address massive public debt levels nationally and locally. German manufacturing is slipping, and Italy’s already fragile economy is weakening more. Overall economic growth in the European Union is stalling to such an extent that the European Central Bank may restart quantitative easing and even purchase equities.

The United States will soon reach the longest economic recovery since the 1850s. While the recovery from the Great Recession has been sustained, it has also been among the weakest of recoveries and has been characterized by growing income inequality not seen since the late 1920s.

This income inequality is breeding class resentment, generating criticism of capitalism and free markets, and nurturing the rise of populist and nationalist movements that challenge the assumptions and practices of the government and business elites that have run much of the developed world since 1945. Brexit, the weakening of global defense and trade alliances, and the rising preference for unilateral rather than multilateral solutions to problems that are, increasingly, global in scope, are reflections of these trends.

Boom times are always better and more fun than economic busts, for sure. But what happens when those boom times are the result of unsustainable, and perhaps harmful, policies and practices?

Three factors drive today’s economic boom, each of which is unsustainable in the long term and will, inevitably, create future economic pain: (1) $1 trillion+ annual government deficits that contribute to a rising national debt now exceeding $22 trillion, (2) 10 years of artificially low interest rates that approached the “zero bound” and, when even modest inflation is considered, have become negative in real terms, and (3) several years of “quantitative easing” by the Fed which resulted in pumping money into the U.S. economy by dramatically expanding the Fed’s own balance sheet.

These practices have been bipartisan and well-intentioned. Barack Obama’s administration endorsed all three approaches to prevent a broader and deeper economic collapse after 2008. Donald Trump’s economic team has continued these policies and realizes that his reelection may depend on continued economic growth.

These policies were designed to stimulate the U.S. economy so that it might reach a point of sustainable “lift-off.” That point has, unfortunately, never arrived, either in the U.S. or elsewhere globally. Economists are debating why this lift-off never happened. Former Treasury Secretary Larry Summers believes we’re in a period of “secular stagnation.” There is also growing concern (accompanied by serious economic research) about the long-term structural consequences of market distortions created by artificially low interest rates maintained by central banks around the world.

Cocaine initially produces feelings of euphoria, energy, and well-being. But ultimately, the highs demand more of the drug, and some pretty bad health effects begin to appear. In some instances, dependency can mean death. (RELATED: GDP Growth Shows The Trump Economy Is A Serious Problem For Democrats)

As former Reagan Office of Management and Budget Director David Stockman wrote in a recent daily blog, capitalism fundamentally “depends upon rewarding savers in order to accumulate and invest in growth capital.” Today’s financial engineering penalizes savers and rewards speculation, stock buybacks, excessive compensation, mergers and acquisitions, and contributes to an equity bubble that features too many overvalued public companies. Whenever the Fed contemplates raising rates, the market swoons because it cannot shake its current addiction to cheap money.

How to wean the global economy off the cocaine of easy money, growing deficits, and serial asset bubbles is the major policy issue no one in either American political party wants to confront. A crash is coming. Whether it occurs before or after the 2020 election is anybody’s guess right now.

Charles Kolb was deputy assistant to the president for domestic policy in the George H.W. Bush White House from 1990-1992. From 1997-2012, he was president of the nonpartisan, business-led think tank, the Committee for Economic Development.


The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.