Most Americans aren’t interested in monetary and fiscal policies, but they immensely impact our economy.
Monetary policy is used by the Federal Reserve to manipulate the economy. There are two primary gimmicks used by the Fed: 1) setting short-term interest rates, and 2) the Fed tries to control long-term interest rates with quantitative easing.
For example, the Fed may lower the Fed funds rate to try to get consumers to borrow more money. Or the Fed may buy Treasuries (quantitative easing or QE) to make more money available for the politicians to squander at a reduced interest rate.
Fiscal policy is determined by the politicians. It involves decisions on taxation and spending.
For example, politicians may raise taxes on one group they don’t like and dole out the money to another group they owe favors to for their vote or financial contributions.
Just to let you know, monetary and fiscal policies are at an all-time high stimulus level! And that’s only getting us sluggish economic growth.
The Fed has interest rates at zero, and it has increased their balance sheet from about $600 billion to over $4 trillion since 2007.
The politicians have increased their spending from $2.7 trillion to yearly spending of $3.7 trillion and have increased the national debt from $8.7 trillion to $17.5 trillion since 2007. Literally, doubling the national debt in just seven years.
I go back to 2007 because that’s when the last recession officially started (ended in 2009).
Meaning, to fight off the last recession in 2007, the Fed had interest rates in the 5 percent range and was able to reduce them to zero and was able to raise the assets on its balance sheet to over $4 trillion. The politicians were able to raise their annual spending by a trillion dollars and raise the national debt by $9 trillion.
Recessions occur on average every seven years. We’re in the fifth year of this expansion.
If another recession hits, monetary and fiscal policies would already be at a high stimulus level. The Fed may not be able to do much, but give a pep talk.
And if the Fed flip-flops with its current QE tapering policy, markets may not respond favorably toward perpetual stimulus and quantitative easing.
Moreover, we won’t be able to simply elect a new president who will be able to borrow another $7 trillion to juice up a slumping economy, unless of course, we plan on electing God.