The U.S. economy seems sluggish today, but ironically, it may also be over-stimulated. Like someone who has had too much caffeine but is on the last reserves of strength, the economy is showing some effects of fatigue that more stimulus might just make worse in the long run.
A growing addiction
In recent years, the standard for being literally over-caffeinated has been raised. It used to be that a second cup of coffee or a couple cans of Coke was considered enough to put someone on the edge between alert and jittery. Now, with people carrying around pocket-sized shots of concentrated caffeine juice, people routinely sail well past jittery to a land of palpitations and hallucinations.
Similarly, it used to be that a little borrowing and some interest rate cuts were considered enough stimulus for a weak economy. Recently though, the standard for stimulus has been raised to include a variety of extraordinary measures.
Unfortunately though, there are signs that the economy has been addicted to these fiscal and monetary energy drinks for so long that they no loner have the desired effects. Here are some signs that the economy may be over-caffeinated:
- Debt keeps rising. The U.S. government ran a budget surplus in 21 of the first 30 years of the 20th century. It has run only eight budget surpluses in the more than 80 years since, the last one in the year 2000. As much as people complain about government spending, many households are in no better shape, as consumer debt continues to grow. The fiscal stimulus of borrowing is no longer seen as a temporary measure, but as a permanent necessity.
- Housing seems dependent on near-record low mortgage rates. There has been some handwringing lately about the fact that the recovery in home prices has slowed down. That's not to say prices are falling, but in an over-caffeinated economy, nothing short of double-digit annual increases will do. The Cleveland branch of the Federal Reserve recently noted that the slowdown is likely due to higher mortgage rates, and that conditions will get worse if rates rise to 5.5 percent. Prior to 2009, 30-year mortgage rates had rarely been as low as 5.5 percent. Now, apparently, the housing market is dependent on rates staying lower than that.
- Stocks care more about interest rates than earnings. The stock market keeps rising despite some spotty earnings announcements, but if there is a hint that the Fed might raise rates much above zero, the market reacts like an over-tired child.
- The Fed seems to miss inflation. Recent writings by the Fed express concern about inflation being too low, almost as if they are laying the groundwork for additional stimulus measures to pump up inflation. This is a bit like missing the headache that sometimes comes with too much caffeine, and taking more caffeine to try to bring on that headache.
Whether it is spending, interest rates or inflation, everybody seems touchy about something these days -- and that is a sure sign of being over-caffeinated.
When people resort to too much caffeine to keep themselves going, it often comes from a "there's no tomorrow" philosophy. That's never the case though: There is always a tomorrow, and the longer people try to deny it, the uglier the morning after will be.