A Benjamin Cole post
The supply side of the United States economy can only grow by 2% a year, and so the U.S. Federal Reserve and Wall Street are “making a big mistake” in assuming the domestic economy “cannot overheat,” said Jim Paulsen, chief investment strategist, Well Capital Management on May 21 to CNBC.
In fact, there is the threat “you’re going to aggravate costs, [and] push interest rate pressures,” Paulsen warned.
It is hard to know where to begin with Paulsen’s analysis.
Global Supply Lines
First, can Paulsen name a single industry that is supply-constrained, that is now rationing output by price? If so, I want Paulsen to name that industry, so I can buy a related ETF.
Paulsen also ignores that the U.S. supply side has globalized since the 1970s. If more steel, autos, computers or architectural services are demanded in the U.S., the supply side is international. Surely, Paulsen cannot believe there is not 2% more capacity in global supply lines (most of which are begging for business, btw)?
Unit labor costs in the U.S. are up 5.8% in the last eight years, and labor income as a fraction of business income declining in the U.S. for decades. Maybe this will change, but for now labor costs are nearly deflationary.
The Economist magazine recently reported there is $12 trillion in cash sitting in U.S. banks and money market funds, earning nearly zero percent interest. And Bain & Co. is predicting capital gluts as far as the eye can see, at least for the rest of this decade. How do you get higher interest rates with capital gluts?
Housing-Maybe A Worry
People in expensive single-family detached neighborhoods do not like sky-rise condos with ground-floor retail erupting next door. In a nutshell, this explains why the U.S. may have housing inflation from time to time. Local housing markets may in fact be supply-constrained. Whether such local regulations lead to national inflation, or should determine central-bank monetary policy is an interesting question. Probably, the Fed just has to live with a little inflation from this quarter.
The main economic problem remains a lack of aggregate demand, in the United States, and globally. Not only that, it sometimes takes a round of inflation to stimulate supply—think oil markets, or even housing markets. The route to greater supply is paved by inflation. Life is not perfect, and that is another example thereof.
So, the Fed should print more money.