US Macro policy - the theory and the practice

We follow the macro situation to be aware of potential big problems and to guide us on asset allocation. US macro policy can be defined as follows in the last few years:- (1) Keep rates low, this will encourage capex spending (2)Buy bonds to reduce the rate, this will force the market to take on more risk, increasing asset prices and increasing wealth, this will increase consumer spending (3) Growth will reduce the debt/GDP ratio. If GDP growth is greater than the cost of debt the country can deleverage It sounds great on paper. However, QE by itself does not improve the economy. Its aim is to increase

animal spirits

- so demand is created by businesses willing to take risks by investing and consumers willing to spend. However, we have found the following happen:- (1) Low rates have decreased the income from cash deposits. With a growing elderly population who have reduced their risk profile this may mute demand. (2) Capacity utilisation has been below average why should businesses invest? Especially if consumer spending has been affected by low real wage growth, little credit availablility, and low deposit rates. The demand has not been there. So why should companies borrow to invest in capex. Better to borrow and buy back stock where earnings yields are lower than borrowing costs. However, higher asset prices only benefit those who are shareholders. This is often those with excess savings, hence the wealthy. Hence QE exacerbates the difference between the haves and have nots which can create social tension. (3) Total debt has not decreased. It has shifted from the problem of a few companies or consumers, to a problem of the whole country (i.e. the government). However, it maybe possible that a critical point is being reached in the US. Employment may be reaching a critical mass where real wages may start increasing. This will boost consumer confidence which can increase consumer spending, this may explain what seems to be the strong start to the Christmas retail season. Credit is becoming more available as US banks are now well capitalised. If this increases spending in the economy and GDP growth increases such that the US economy can start deleveraging, the economy will be improving in almost all metrics. This could even start a slow and gradual increase in rates increasing the income of low risk investors. This would be a virtuos cycle indeed and would be an important moment for central bank policyholders - who would deserve to be congratulated. However, due to the success so far relative to other countries the USD has started to appreciate. Though the trade defecit is shrinking as foreign oil demand is weakening due to large energy reserves found inhouse, it may affect the export market. For the Americans however this may be benefited by weaker commodity prices, which often have a strong correlation to the USD as they are transacted in USD.