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Wednesday, August 24, 2016

Fed Rate Hike and the Nature of the New Economy

I read a CNBC article by Ron Insana entitled A Fed rate hike now would be a disaster for the economy which brings up some good points about how the Zero interest rate policy, quantitative easing, and negative interest rate policy no longer have the muscle to spur the economy. I also agree that government should work with stakeholders, even global if necessary, to find new tools. There are two points such as global nature of the economy and economic fundamentals to further this argument.

1. Global: We live in a global economy and therefore stimulus in one country doesn't necessary stay in that country. It is like putting water into a bucket with many holes. The impact is blunted and muted by how interconnected we are. To create meaningful stimulus with these methods requires greater coordination among countries.

We must also understand that our policies and activities influence many nations. While we seek to bolster our own economy we are inherently reliant on other economies that supply, buy, and finance our activities. Therefore, new economic theories and tools will need to be created that understand and work with this complexity.

2. Fundamentals: Easy cash is helpful but is only one piece in the pie that creates the environment for growth. We can't neglect things like government debt, infrastructure, education and other pieces that create a total growth environment. Because the economy and its factors are complex it is helpful to focus more on regional hubs and local clusters when understanding the economy to master the main mechanisms of growth.

Furthering this thought, the fundamentals of the economy rely on 5 economic elements of linkages (People, Finance, Resources, and Information), Intellectual/Human Capital, National Structure, Culture, and Leadership. Technology will help businesses and people to connect together for value creation, creative abilities of workers should be enhanced and fully employed, government should be effective and trustworthy using resources wisely and protecting people's inherent rights, a culture of creativity and productivity should be encouraged to foster entrepreneurship and innovation, and solid leaders with the capacity to lead people into the next era should be allowed into the stagnant political system.

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