Wednesday, February 14, 2018

Economic Contradiction

Except for their excellent research department, I have not respected investment giant Goldman Sachs since 1981, and that opinion was affirmed in 2008.  Therefore, it pains me to agree with their CEO, Lloyd Blankfein.

The governmental tools to govern the economy fall into two categories, i.e., monetary policy and fiscal policy.  Monetary policy is controlled by the Federal Reserve, using interest rates and money supply.  Rising interest rates and restricting the growth in the money supply is restrictive monetary policy, to be used when the economy is "hot" and needs to be "cooled" before inflation begins.  Right now, this is the policy of the Fed.

Fiscal policy consists of both regulatory policy and, more importantly, budgetary policy, which is the taxing and spending of money.  A budget surplus "cools" the economy.  A budget deficit "heats" the economy.  Reducing taxes and increasing government spending, that produces a bigger deficit.  Right now, that is the policy of our Federal government.

The tools of monetary policy and fiscal policy are in conflict with each other.  The Fed is worried about inflation and is trying to slow down, while the Trump Administration sees no inflation and is trying to speed up.

CEO Blankfein says the president is spraying lighter fluid on a bed of hot coals . . . I agree!