Top-Down Approach Is Not Working… Go Bottom-Up

bottom up sign

Economics is full of ideas for fiscal & monetary policies. But these policies are Top-down approaches. They work through investment and the financial system.

Yes, China lowers its benchmark rate from 6.0% to 5.6%, but China is supporting a failing policy of over-investment. Debt rises… and non-performing loans are increasing.

Yes, Draghi wants to do whatever stimulus is necessary to battle super weak inflation in Europe, but he is not getting to the root of the problem. Real wages are being cut in an effort to increase competitiveness for Euro-zone exports.

Yes, Japan has decided to raise the stimulus of Abenomics as consumers react to the increased sales tax. However, unless real wages rise (not just “for show” bonuses), Abenomics is doomed to failure.

And in the US, M2 velocity is still falling. Graph below is “Percent change from year ago” updated to 3rd quarter 2014. Falling M2 puts downward pressure on inflation, against which aggressive monetary policy has to fight. People are not receiving enough income. Consumer credit from the financial industry is not strong like before the last 2 recessions. People are spending cautiously. If Main Street has more money in their hands, M2 velocity will rise.

update m2 velocity yoy

The answer is to raise real wages across advanced countries. The approach must be Bottom-up.

Disclosure: None.

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Kate Hayden 9 years ago Member's comment

Meanwhile can I get that sign for my lawn? Love the picture. (More seriously, I do agree with your premise.)