Between a Rock and a Hard Place

There was an interesting article in the paper today. It noted that automakers were concerned about the possibility of an increase in interest rates, which the Fed has been considering. Such an increase, the article went on the say, would seriously cut into sales, and force the companies to cut back on production and/or make riskier and longer term loans to continue their brisk business (the best since 2006). It didn’t mention builders, but one can assume the same to be true there and most probably also for other durable goods manufacturers

This is a clear indication of the problem the Fed is facing. The current lackluster “recovery” (which, by the way, is the third or fourth anemic recovery in a row) is so precarious that the Fed has had to keep interest rates below zero (when inflation is factored in) to maintain it. This has a number of negative consequences, the most significant of which is that the Fed has no wiggle room should the economy slowdown from its current pace. In other words, the monetarists seem to have run out of effective tools to manage the economy.

Add to this the fact that many major economies outside the US (China, European Union, Japan) are weak (which precludes the US exporting its way out of a possible recession) and the fact that the average business cycle is about 10 years (and the last recession started 7 years ago). Not a pretty picture.

The cause is undoubtedly the extreme and increasing inequality. As Thomas Piketty pointed out in his book, Capital in the Twentieth-First Century, the extreme level of inequality is a central feature (we might even say, contradiction) of capitalism throughout most of its history, except for the extraordinary period between WW I and the 1970s. Two factors account for the reduction of inequality during that period – first, the destruction of capital that resulted from two World Wars and the Great Depression, which greatly reduced the “claim” of capital on the national income, and second, significant government actions to redistribute income during that period.

If this analysis is correct, then the only way to avoid a crisis the likes of which we haven’t seen since the end of WW II, is income redistribution, on a scale which probably goes well beyond what even progressive politicians like Bernie Sanders are proposing. With the current political dysfunction at the national level, will it be possible for the US to move in this direction or are we destined to head further down the rabbit hole?

George Vlasits

October 18, 2015