May 22, 2018
Please read important disclosures HERE
May 22, 2018
Please read important disclosures HERE
SPECIAL SECTION: This is a new section of Perspectives intended to encourage a discussion and dialogue. This is the 2nd of a 2-part series. This article follows the Op-Ed article entitled “Federal Reserve Should Embrace Pain To Ward Off Future Financial Collapses” published in the San Francisco Chronicle on December 18, 2017 and is available to read here.
One of the unintended consequences of the extraordinary policies and market interference on the part of public policymakers (Congress, the Fed, etc.) and regulators has been a significant change in the average citizen’s perception of these institutions and markets. Main Street sees insider trading scandals, bailouts of banks despite questionable lending practices, private equity money getting access to flash-trading mechanisms the general public cannot access, the manipulation of the LIBOR interest rate, outright fraud perpetrated on trusting investors (à la Bernie Madoff), and on and on — all of which lead to a breakdown in trust for key public institutions and markets. If these entities are not checked, the final outcome could be a complete loss of faith in governments themselves, including their currencies.
Americans are already rapidly losing faith. As I write this article in April 2018, the most recent Gallup Poll (dated April 13th) shows that only 38% of Americans approve of the job President Trump is doing. But he’s lucky; the job approval rating of Congress (as of April 18th) is a dismal 18% (but better than the low of 9% it hit back in November 2013!). It gets worse. In the latest Gallup Poll available (June 2017) on Americans’ view of institutions, confidence in Congress dropped to just 12%, while confidence in the presidency fell to just 32%. Only 40% of Americans said they have confidence in the U.S. Supreme Court, 36% in public schools, 32% in banks, and 27% in newspapers. The top confidence vote-getters: the military (72%) and small businesses (70%).
Remember when Walter Cronkite, the venerable anchor for CBS Evening News (1962–1981), was the “most trusted man in America”? Well, in a poll released in May 2013 by Reader’s Digest/The Wagner Group, actor Tom Hanks, someone whose professional life involves pretending to be someone else, took the top spot among the 10 most trusted persons in America. In fact, actors occupied the top four posts (Tom Hanks, Sandra Bullock, Denzel Washington, Meryl Streep), while seven of the top 10 were either actors, a movie director, or a TV game show host (Steven Spielberg #6, Alex Trebek #8, Julia Roberts #10). In fact, the top-ranked politically related person in the poll was Michelle Obama (#19). What does that say about how much our trust has changed over just the past three decades?
While faith and trust in people, institutions, and even currencies can collapse very quickly, it takes many years (even decades) to build back up. After the loose monetary policies and stagflation years of the late-1960s and 1970s, former Fed Chairman Paul Volcker’s reigning in of the U.S. money supply between 1979 and 1981 in order to kill off inflationary expectations still couldn’t drive actual inflation below the long-run average rate of about 3% for any calendar year until 1992, over 10 years later.
Should a complete loss of faith happen, it increases the likelihood that social extremism and even anarchy steps into the breach. One only needs to think back to the global situation of the late 1920s and 1930s — recessionary and depression-level economic conditions globally, increasing trade and currency wars, the expansionary fight for territory and resources, and the ascendancy of extremist ideologies — that contributed to the onset of nationalism, fascism, and World War II.
U.S. leaders are essentially gambling on an all-or-nothing proposition with the actions — and inaction — they’ve pursued. If these policies fail, or worse, prove to have created new asset bubbles or financial crises, the last bastions of faith left in the U.S. federal system and national financial markets could be lost — a faith that would take years — if ever — to win back. In other words, all credibility and political capital will have been spent; there will be nothing left to fall back upon.
This is not to say that I predict dire consequences for the U.S. or even global economies. In fact, my best guess as to the most likely scenario for the U.S. economic outlook is for continued low-to-moderate inflation and slow but relatively steady growth, with some blips along the way. U.S. policies to date have resulted in an environment much like riding Autopia at Disneyland: you push the accelerator to the floor, but the regulator on the engine limits your speed to just two miles per hour! At this point, the Fed has done more than what would have been expected. The rest is up to Congress and the regulators.
So how should politicians, the Fed, and other regulators respond? How can companies and individuals survive and thrive in such an environment? Perhaps they could start by following some simple truths:
Live within your means.
For individuals, this means spending only what you can afford, saving for a rainy day and carefully scrutinizing potential obligations.
For governments, it means focusing on relatively balanced budgets, at least on average over the intermediate and longer terms. It also means never promising future benefits you cannot fully fund starting today.
Express humility in all things.
What we may need is a little less willingness to make all-in bets on policy and more humility in our ability to predict or control the future. Humility will also breed more trust from and cooperation by the regulated. Investors and regulators must also relearn to embrace some level of pain (risk) in order to allow all markets to function normally and to self-correct in a more timely fashion.
Don’t expect the Fed to do it alone.
At this point, the Fed has essentially exhausted all of the tools in its toolbox to help the economy. The rest is now up to Congress and the administration. Politicians must get back to acting in the best interests of the public, not the party. In short, we need intelligent discussion, debate, and compromise that leads to definitive and long-term action. Individuals and corporations need to know what the playing rules are going to be, not just for this year, but for the next decade and beyond. Only then can their animal spirits — and cash — be fully released toward more productive uses.
Fortunately, we are seeing positive movement on all of these fronts, albeit in fits and starts.
Remember that while we may periodically lose faith in some of our leaders, Americans never lose faith in the ideals and future of our country. Collectively, we are a hard-working and thrifty people; we are not easily fooled.
So most importantly: Keep the faith.