Wacky is the only way to describe the current economic and stock market environment. Market pricing has become unhinged from the reality of fundamentals. Jobs numbers are increasing, but wage growth remains stagnant. Household net worth – as a percentage of disposable personal income – has never been higher. While we can’t predict what the markets will do, our current situation seems reminiscent of the events preceding the dot-com bubble burst in 2000 and the collapse of the housing market in 2007.
It’s clear that the monetary stimulus enacted by the Fed following the start of the 2008 Financial Crisis and Great Recession has now run its course and is failing to boost economic growth. For nearly a decade, the Fed’s monetary program has focused on zero interest rates and so-called “quantitative easing” (QE). This program was designed to lift asset prices, delivering a “wealth effect” intended to make people feel better about their financial situations and, as a result, spend more money. Consumers took the bait and have done their part to lift the economy to positive growth under the toughest economic conditions since the Great Depression.
We have to give the Fed credit: its monetary policy provided an immediate boost to GDP and initiated a recovery from the Financial Crisis that might not have happened if they ceased to act. Nevertheless, it was a Band-Aid on a bullet wound because what’s been missing in the recovery effort is fiscal stimulus, which could create continuous, long-term GDP growth and has been traditionally paired with monetary policy to ramp up growth coming out of a recession. Considering the dysfunction in Washington, it isn’t surprising that Congress has failed to enact fiscal stimulus because it’s a key component of the budgetary process. No budget, no fiscal stimulus. And Congress historically has taken years to pass a budget.
Meanwhile, U.S. infrastructure – once a shining example to the world – is crumbling and in desperate need of a $3.6 trillion investment by 2020 to prevent near-term disaster. This was true before Hurricane Harvey wreaked havoc on southeast Texas; now, the situation is even more dire. Bridges, roads, tunnels and technology are the arteries that carry the economy’s lifeblood. They need fixing now, not later. The infrastructure spending plans proposed by Congress are a drop in the bucket compared to the amount of funding required to alleviate this crisis.
These two ideas – that, without fiscal stimulus, the current monetary policy toolkit used to promote zero interest rates and QE could end up unraveling the fragile economic balance established after the Financial Crisis, and that America’s infrastructure is in a dangerous state of disrepair – may seem unrelated, but the case is quite the contrary. Prior to the Financial Crisis, the Fed’s balance sheet was $900 billion; today, it’s $4.5 trillion. For some time, the Fed has been looking for a way to unwind some of the excess capital they’ve accumulated during QE operations. Using that cash to fund infrastructure, while unconventional, could be a home run.
If Congress cannot set aside its toxic political backdrop to approve a budget and enact a fiscal stimulus, the Trump administration should create an “infrastructure bank” that includes a reasonable methodology to allocate capital and partner with industry. A rational and fair approach would be to allocate infrastructure funding to each state based on their pro rata contribution to GDP – the largest contributors to the economy would likely need larger capital infusion to address infrastructure needs than smaller state economies. Texas, the second-largest contributor to GDP, will obviously need support to repair roads, bridges and tunnels damaged by Hurricane Harvey; New York, the third-largest, is still dealing with the aftermath of 2012’s Hurricane Sandy.
Here’s a clear picture to show you how far behind the U.S. is in addressing its infrastructure and spending issues. Let’s compare us to China for a moment. China spends 8.6% of its GDP on building up roads and railways to support economic growth – that’s more than triple the 2.5% the U.S. spends. In the past 30 years, China has grown from an emerging economy to the second largest in the world, and for the last 10 years, that growth has been primarily driven by infrastructure spending. Central planners in China are likely betting that their world-leading infrastructure foundation will easily allow them to become the largest economy in the world.
The U.S. needs to step up to the plate on infrastructure spending or get left behind as a second-class economy. Creating an infrastructure bank from excess funds in the Fed’s balance sheet would allow critical infrastructure needs to be addressed quickly and could provide a significant boost to our faltering economy. This could also eliminate the dependency on a toxic Congress to pass a budget, something that looks less likely by the day. Infrastructure funding would support a wide swath of American business in sectors and industries such as construction, equipment, materials and services.
The money on the Fed’s balance sheet is not the Fed’s – it’s the property of the American people. The Treasury expanded the Fed’s balance sheet at the expense of the U.S. taxpayer in the Financial Crisis to prevent a second depression. This was part of the $9 billion ballooning of the U.S. deficit, but the good news is, the money on the Fed’s balance sheet is already in the deficit and can be recycled to support infrastructure funding without driving deficits higher. Hopefully, unconventional ideas like this one will be embraced by our president and his cabinet before our economy slides further toward recession. If we wait for Congress to get its act together, we may be waiting a long time.
Don Schreiber, Jr. is the founder, CEO and co-portfolio manager at WBI Investments, which provides institutional and private client wealth management solutions.