Federal Reserve Poses Greater Risk

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    Investors should not be confident that the U.S. federal reserve knows what it is doing, says Lacy Hunt, executive vice-president and chief economist at Hoisington Investment Management Company. In the session ‘Will The New Administration’s Economic Initiatives Overcome the Dynamics of Extreme Over-Indebtedness?’ at the CFA Society Toronto’s ‘2017 Annual Spring Pension Conference,’ he said the emphasis on the fiscal initiatives of the new administration are misplaced. While markets have rushed to judgment that U.S. President Donald Trump’s fiscal programs have great promise, they may or may not happen. Instead, the focus should be on the federal reserve as when it engages in tightening activity, recessions typically follow. Since 1947, there have been 14 tightening cycles and the fed has only been able to engineer three soft landings. And the economy today is weaker than at the start of any of the recessions since 1947. He cited reduced monetary growth, high levels of indebtedness, and a velocity of money at its lowest since 1950 as indicators of the state of the economy. In 1997, for example, it took $1 to generate $2.20 of GDP. Today, that dollar only produces $1.44 of GDP. As a result, Trump’s fiscal initiatives will be largely ineffective if they are funded by debt, producing only transitory fleeting gains. In fact, in terms of tax cuts, when Ronald Reagan cut taxes in the 1980s, the gross debt was 37 per cent of GDP. Today, it is 106 per cent and will move dramatically higher in the next 20 years. As debt levels move higher, the negative impact on growth moves up, he said.