12 Jul

Is Fiscal Spending the Solution to Economic Stagnation?

WRITTEN BY Surbhi Jain

Fiscal side is non-existent

Bill Gross sees the fiscal side of the current system as “non-existent.” Since monetary policy tools that have been used by the Fed all of these years seem to have lost their efficacy, the Fed’s responsibility of securing growth in the US economy (IWM) (IWD) (IWF) might be fulfilled by using fiscal measures.

Is Fiscal Spending the Solution to Economic Stagnation?

Business spending is declining

The private sector hasn’t spent enough to be able to impact growth. Factors that have contributed to businesses cutting spending include heightening global (VXUS) (ACWI) (VT) uncertainty, the commodity (DBC) price plunge recently, currency wars impacting business income, and global deflationary pressures that aren’t showing signs of abating despite monetary policy initiatives such as QE (quantitative easing) and low (even negative) interest rates in most of the developed world.

Need for fiscal rescue

The time has come for the public sector (the government) to step in and ensure spending and growth in the economy. Spending is critical to growth. “Until governments can spend money and replace the animal spirits lacking in the private sector, then the Monopoly board and meager credit growth shrinks as a future deflationary weapon” said Gross.

This aspect has been elaborately and descriptively explained in Ray Dalio’s Economic Principles template. You can read, Ray Dalio on the Next Downturn: What You Need to Know to learn about Ray Dalio’s perspective on the economy. Bill Gross also proposed it in his March 2016 outlook. To learn more, read Bill Gross: It’s Time for Fiscal Policy to Take the Baton.

In his May 2016 outlook, Gross advocated “helicopter money.”

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