SUPPLY SIDEWINDERS

I was watching Lawrence Kudlow on CNBC March 19, 2014.  He was hosting some of the Usual "Supply-Side" (admittedly) Suspects thereon, all validating each others' economic analyses in unison.  I swear, one of them actually admitted to being a "supply-side" thinker.  Kudlow prattled on about the non-existent "free market" for capitalism.  The US has highly-regulated markets, for good reason.  The antitrust laws are are valid example and are utterly inconsistent with a truly "free" market, which would otherwise favor monopoly.

Back in the old days, basic generic market analysis was a balancing act between the "supply" of goods and services vs. the "demand" therefor.  Because a huge demand remained a relatively constant force so long as we Baby-Boomers were fully in the marketplace, buying up and consuming all manner of objects and services, the post-WWII "supply-side" methodology worked; that is, tinker with the "supply" of things (like the money supply) and raise or lower costs to manipulate the otherwise-steady demand in the marketplace. 

Traditionally, the Fed(eral Reserve) has been able to manipulate the money supply with three basic statutory tools: (1) increasing or decreasing the "Reserve Requirement," which is the amount of cash that banks must keep on hand that cannot go into circulation, thereby increasing or decreasing the availability and interest cost of loaned money; (2) manipulating the (short-term) Federal Funds Rate, the interest rate paid on short-term (12 mos. or less, I think) Federal bonds, the ripple effect of which goes into the interest costs of short-term debt generally and, ultimately, all debt; and (3) manipulation of the Interbank Funds Rate, the overnight interest rates paid by banks to each other as the aggregate money supply is moved around from bank to bank.

Thus, manipulations of the money supply by the Federal Reserve were predictable and effective: increasing or decreasing the money supply overall to make "money" (and debt) more or less expensive.  Debt was relevant since there was so much of it created by us Boomers spending like drunk sailors to buy stuff!  Our "savings rate" stank to high heaven and instigated a lot of anxious paw-wringing!  We didn't save diddly!  As we Boomers have aged, though, I think those days are gone forever.  The Federal Reserve, limited to its three traditional tools, has recently been aggressively buying up Federal bonds (govt.-issued debt), thereby propping up artificially high bond prices to keep interest rates artificially low.  One must keep in mind that the price of fixed-income debt instruments (like bonds) and the rate of return (interest rates) are inverse to each other: one goes up--the other must go down.  Low interest rates favor those who borrow money ONLY, but the vast majority of people now do not borrow money they don't have to, and they are certainly not in the stock markets!  Most folks don't have an IRA or 401k plan--they will likely rely strictly on Social Security (SS) or employer pensions for retirement.  The contrived low interest rates have, however, inured to the immediate benefit of those who buy stocks on margin (borrowed money) who thus have additional stock purchasing power enabled by low interest rates.  That, along with companies buying up their own stocks, has recently kept stock prices and indexes high, but sooner or later I think the overall lack of purchasing power is going to force the chickens to come home to roost in the form of a serious stock-market sell-off.  The new Fed chair, Janet Yellen, simply made some remarks on March 19 indicating a possible (and utterly predictable) future reduction (not cessation) in Fed bond-buying, and just those remarks caused a modest market sell-off!  What is going to happen in the stock markets when the Fed actually DOES reduce or stop its bond-buying and/or companies reduce or stop their stock-buying?

I vehemently disagree with the "supply-side" approach to economics.  I think it is no longer relevant, if ever.  NO ONE among the so-called "experts" has addressed even as a possibility that the current economic crisis may have something to do with the rapid fall-off in DEMAND because of us Boomers aging AND people losing high-value employment.  We "neo-geezers" just ain't buying cars, refrigerators, homes, records, bar tabs, etc. anymore!  Just ask bar and restaurant owners!  Then add to that the serious degradation of the purchasing power of so many people who barely have enough cash to live, much less engage in discretionary spending.  We are now seemingly caught in a whirlpool of lower or loss of wages and middle-income salaries that have reduced purchasing power (demand), which then forces businesses to lay off employees, who thereby have no discretionary money to spend among the suffering businesses!  Why is all this not a subject of discussion among the "experts," even to debunk its accuracy?

Most truly "middle-class" people's primary wealth asset is their personal dwelling, not stocks.  Only a relatively few folks have any "skin" in the stock markets.  In my opinion, the currently high stock markets are masking the true economic conditions among us because so many "experts" are looking at only the stock markets as a measure of economic health.  Janet Yellen got a lot of criticism from the smug "experts" on Kudlow's show for her consideration of various "vague" employment data in the Fed's decision-making.  As I said, the chickens might soon be coming home to roost!

NOTE: the Fed does NOT "print money" as so many "experts" complain; the US Treasury prints money just down the street from the Smithsonian at the Bureau of Printing and Engraving.  The Treasury is an arm of the Executive Branch; the Fed is a totally independent agency, as much subject to the control of Congress as of the President.` The Fed makes "monetary" (money-supply) policy only; "fiscal" (Federal debt/deficit) policy is determined by statute between Congress and the President.

NOTE2: Many employers are now trying to change their retirement plans from "defined benefit" (fixed pay-out) plans to "defined contribution" (fixed pay-in) plans, more like 401k's.  Thus, employees' eventual retirement prosperity could more and more vary with the fickle health of the stock markets than before.