Macroeconomic Growth - Three Key Levers

It is difficult to make money by focusing on macroeconomics as there are inevitably unintended consequences. For example, the huge stock market drop in December of 2018 (the largest since 1931) was a result of the Fed's excessively tight monetary policy. But that surprisingly violent stock market drop led to a reversal of Fed policy over to a looser monetary policy. To forecast on a linear basis any macroeconomic factor is problematic. Despite that, macroeconomic focus can help in not losing money.

There are three primary levers that seem critical. In order of importance, these levers are: monetary, fiscal and regulatory. To understand economic growth, each lever needs to be understood.

The first lever of economic growth is monetary policy. Monetary policy is controlled by the Fed and it is the Fed that fundamentally affects economic growth. Ben Bernanke commented, "economic expansions do not die of old age, they are murdered by the Fed." As pundits talk about the length of our economic expansion, they are referencing a meaningless fact. Time is not the issue; perceived misallocation of assets is. The Great Recession was induced by the Fed, but blamed on the housing market. If the government had overhauled mortgage finance, the journey would have been superior to the Fed's choking the economy and then attempting to revive the dying patient.

The second lever of economic growth is fiscal policy. During the Obama years, a period of strong monetary support, there was little fiscal support. A Republican congress tightened up fiscally in an attempt to reduce deficit spending. While this attempt probably led to a reduced misallocation of funding, it did dampen the ability of monetary policy to generate growth. When Donald Trump was elected, fiscal policy was estimated to improve based on infrastructure spending. But that spending never happened. Instead, huge fiscal support came from the reduced taxes of the Tax and Jobs Act of 2017. The Fed attempted to tighten monetary policy in the face of it, but December of 2018 caused the combined force of monetary and fiscal policy.

The third lever of economic growth is regulatory policy. Regulatory policy is invisible, but critical. The United States has less regulatory constraints than other countries. As a result, our economy moved from agriculture into manufacturing more easily than others (such as Argentina) and is moving into services capably. Japan, for example, has strong monetary and fiscal support, but its regulatory structure inhibits its movement away from manufacturing into services. The result is evident and helps answer the question why the the last decades have been lost in Japan.

Understanding these levers may not make money but can help shape of framework for investing and, probably as important, voting sensibly.