The S&P 500 rose to record highs last week on remarkably dovish comments by Federal Reserve Chairman Ben Bernanke that helped alleviate market concerns over imminent tapering of quantitative easing (QE). In a question and answer session at the National Bureau of Economic Research, Bernanke said the unemployment rate understates labor market weakness and the inflation rate remains too low, unequivocally concluding: "both sides of our mandate - both the employment side and the inflation side - are saying that we need to be more accommodating… that highly accommodative monetary policy for the foreseeable future is what's needed."
David Fuller's view I have long regarded monetary policy as the most important fundamental indicator for stock markets, and Mr Bernanke's monetary taps are certainly wide open.
However, one of the reasons why the Fed Chairman is providing all this liquidity, which he has not stated, presumably for politically sensitive reasons, is that the US government has weakened the economy with several redistributive measures, including a high corporate tax rate of 35% and expensive medical costs.
I am not quarrelling with this because it was the US electorate's choice at the last election. However, it strikes me as a step in Europe's direction, rather than policy assistance for one of the world's more entrepreneurial economies, as it struggles to regain a higher rate of GDP growth. I also think the US economy would have been considerably weaker, had it not been for fracking, which the Democrat government initially opposed.
The USA's corporate tax policy has done America's unemployed no favours. However, there is a far greater headwind for jobs, which I have often mentioned. The accelerating pace of technological innovation is replacing both white collar and blue collar jobs more quickly than they can be replaced. I would not underestimate this problem because it is very likely to persist over the longer term.