I had always thought that the Federal Reserve decided against reducing its quantitative-easing program last month entirely because our politicians would probably not be able to negotiate a budget compromise and avoid closing the government.
Sadly, the central bank was justified in backing away from any so-called tapering of its monetary policy, as its fears were borne out in this month's 16-day shutdown. The only thing worse for our economy would have been for the Fed to taper in September and then be forced to reverse that decision, possibly even increasing monetary stimulus, in response to the shutdown.
I said for months that growth would be held back by Democratic and Republican brinksmanship and the ridiculous behavior of both sides. And even after the so-called resolution to the crisis, I've seen nothing to change my opinion of Washington. Our politicians used the shutdown to fund-raise at record levels, which means only that they have deeper commitments to continue their partisan rancor.
My belief is that the economy was not robust, but more like a person recovering from a long illness. As signs of health were returning, the patient was still weak and needed more time to return to optimal performance. The economy was not growing as fast as it could or should because of fears over what a prolonged shutdown could mean for consumer confidence and demand.
That was reflected in anemic back-to-school spending numbers, as parents elected to keep such expenses to a bare minimum. This lack of consumer confidence was another issue to be considered at the two-day meeting of the Federal Open Market Committee in September. In addition, I have had the opportunity to speak with several foreign business leaders and CEOs whose companies operate in the United States that could not justify additional hires amid all the uncertainty.
For further evidence of chaos that resulted from the shutdown, you need look no further than the wild swings in gold. At the end of September the precious metal fell from $1,360 per ounce to a low of $1,250 just before the last-minute decision to avert the impending budget default. Traders will likely continue to chase gold higher into positive negotiations between Republicans and Democrats but drop the precious metal if a deal in January/February seems in peril.
So I cannot fault the Fed for continued its easy-money policy, as its accurate assessment of the delicate health of the patient and the lack of fiduciary duty by our leaders left the bank with no choice but to pull back from any plans to reduce quantitative easing.
There was always the risk that the United States could lose credibility with entities that own and/or regularly purchase our debt. That risk would be far worse if the rest of the world had its fiscal houses in order, leaving us as the outlier. But such was not the case.
As bad as our lack of fiscal restraint has been, most of the world is even less disciplined--hence the oft-heard reference to the United States as "the best house in a bad neighborhood." While Germany may be far more disciplined and focused on growth, it is joined at the hip with the rest of the European Union, so Spanish, Italian, and Greek financial distress hold back growth much as our political infighting did in this country.
Without leadership from the president and Congress, our Fed was left with little choice but to use the extraordinary measures that have become known as QE. And while the rapid reduction of interest rates has helped nearly every sector of the economy, it most directly affected housing, auto, aircraft, and related sectors the most. But whether by design or by accident, QE has robbed those living on fixed income and pushed wealth to the 1 percent in unprecedented fashion.
Economic historians will detail how the Fed's action saved jobs, but I suspect that they will be torn as to whether the widening wealth gap was positive or detrimental to our society. There will also be debate over whether the European model of austerity was a better long-term solution for recovery than our model of inflating at the expense of the elderly and middle class.
Ultimately, it seems unlikely that the temporary government shutdown derailed our recovery, but it did train a spotlight on our economic growth--or lack thereof--in glaring fashion. Future growth will depend on whether our politicians surprise the world and, rather than a perpetually kicking the can, actually bend over and pick it up. That means our elected leaders must choose whether to delay the hard decisions for yet another year or negotiate reductions in entitlement spending and tax reform so that businesses can plan with a better degree of certainty.
As a glass-half-full kind of guy, I hope for the latter. But the realist in me bets that we'll see a can bouncing down the road in February 2014.
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