An issue I've written about several times over the past year is the imminence of a fiscal response by the U.S. government to the lack of economic activity yielded by monetary stimulus over the past several years. I've received many questions about this issue and will address them here.
It is not my opinion that a fiscal response at the federal level is necessary. It is simply a mathematical certainty that it will occur.
The lack of private sector demand, mainly due to the fact that aggregate national income is now collateralized to service existing debts -- which by definition precludes new net public debt creation -- and the failure of monetary stimulus to have counteracted that problem dictate that the attempt to create growth must now come from fiscal policy.
This is irrespective of the various arguments concerning whether fiscal spending can succeed in being the catalyst for a return to secular growth. It doesn't matter whether it can achieve that objective, and it is probable that it cannot.
However, it can cause a cyclical increase in economic activity, and that's what's important now.
As certain as this is, though, the political will necessary for the enactment of a substantive fiscal response almost certainly will require an economic crisis that causes the populace to demand a government response, and thereby provides cover for fiscal conservatives in Congress to go along with voting for a fiscal response.
The shift in what is considered acceptable public policy is known as the "Overton window." That is, public policy issues or decisions that are deemed unacceptable to the public and thus nonviable politically can shift almost instantly in the opposite direction in response to a crisis.
This is precisely what occurred immediately following the failure of Lehman Brothers in 2008 and gave rise to zero interest rate policy (ZIRP), quantitative easing (QE) and the Troubled Asset Relief Program (TARP).
The failure of those policies to have counteracted the economic fallout experienced by large percentages of the U.S. population provided an Overton window shift in what they demand of government and gave rise to support for the anti-establishment messages from Donald Trump and Bernie Sanders.
However, that support and the incremental and increasing advocacy by global central bankers, academics, bankers and even the two presidential candidates in the U.S. for the need for a fiscal response does not mean it will happen without another crisis.
Elected officials do not act to pre-empt crisis and will not vote against the ideological proclivities they ran their campaigns on without a crisis providing the cover for doing so.
That means that regardless of who wins the presidential election in November and which party controls Congress next year, the political viability of a national infrastructure program focused on stimulating domestic economic activity is not likely to be enacted for the 2018 budget unless an economic crisis occurs within the next year.
Even with the support for anti-establishment candidates and policies and even though a recession is possible within the next year, it probably wouldn't be severe enough to be considered a crisis allowing for what is deemed to be an acceptable shift in public policies to counteract it.
The most logical path for a domestic economic crisis to occur is in response to a monetary policy mistake, which would probably come in the form of a rate hike to which the markets respond negatively.
That negative market response, before cascading into the real economy, probably would cause equity values to decline substantially, including those of the infrastructure companies.
However, those companies will also be the principal beneficiaries of a domestic infrastructure program that would become politically viable as a result of the crisis.
The companies I've been expecting to benefit the most from such are Jacobs Engineering Group (JEC) , Fluor (FLR) and Chicago Bridge & Iron (CBI) , which I last addressed in the column," Idea of Fiscal Stimulus via Infrastructure Spending Gains Traction."
That means that investors currently should anticipate substantial volatility in these stocks over the next year as concerns about whether there will be a fiscal infrastructure program as part of the 2018 budget plays out, which will largely be determined by the economic situation next year.
As I said at the beginning of this piec0,e however, ultimately there will be a fiscal package dedicated to stimulating domestic economic activity at some point.
