Housing is a keystone indicator to the health of the economy.
So much pivots on the industry: landscaping, furniture purchases, retail. When housing starts are down, the economy is under stress.
There are two phenomena affecting the economy today. Both are the result of faulty Monetary Policy. Both negatively impact the private economy. Both are at cross-purpose, they counter-act each other, leaving the economy in limbo. Great uncertainty fosters paralisis and stagflation. Personally, I have high hopes on the new Fed Chair addressing the source of our current economic malaise.
Higher interest rates have a depressive effect on activity, the cost of borrowing increases when fed fund rates increase. The fed fund rate indirectly affects loan rates, by driving up bank cost of funds. Granted the Fed Reserve only impacts the overnight rate, but their action or inaction can influence the long rate.
Second, excess supply of money, starting in 2008, caused severe dollar devaluation (inflation). Money supply (liquidity) should be stimulative, however, the massive infusion of dollars into the economy, through QE, devalued the dollar resulting in substantial price inflation. This has undermined the citizens ability to meet his regular obligations. So excess money supply has become depressive.
The new Fed Reserve Chairman is aware of these problems. If anyone can fix the problem, he can. He recognizes that inflation is not going to be fixed by strangling the economy with high interest rates. Further, he has stated that excess money is the problem and intends to reduce same. As we’ve been saying for 20 years, reducing money supply is the correct answer to the problems in our economy.
The crux of spending is that every dollar the government spends comes from the citizen. The big government politicians talk about how they will fix all problems through spending, but they never, once, say what the source of that money is: Taxes and national debt, that citizens pay back, is the source of spending by our elected officials.
Reduce the money supply available for politicians to spend, by reducing dollars in circulation, will force less spending. Less government spending means the citizen keeps more of what he earned. Who is going to spend more wisely? The person who earned the money through hard work or the person who stole the money through taxation.
Reducing money supply causes short -term pain, like an addicts withdrwal from heroin. It means that politcians and bureaucrats can no longer spend nor go into debt. This single act will return liberty and freedom to the private economy. In other words, the citizen will get to keep more of what he earns and spend less on taxes and federal debt service.
Jay Davidson is founder and CEO of a commercial bank. He is a student of the Austrian School of Economics and a dedicated capitalist. He believes there is a direct connection between individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.