An Argument for Unconventional Monetary Policy

NEW YORK ( TheStreet) -- There has been much discussion over the validity of unconventional monetary policy around the world. Many believe it has limited effects and will ultimately lead to a hyper-inflationary spiral.

Although there are truths to both sides of the argument, in today's financial system, stimulus can be beneficial. Stimulus has allowed corporations to boost earnings even in the face of lower revenues.

With regards to inflation, the Federal Reserve balance sheet is as large as ever, and M1 money stock continues to move higher. Interestingly enough, inflation expectations remain suppressed and global growth continues to be tepid. The reasoning is that sentiment drives these concepts rather than some hardwired economic truth.

The last aspect that will be discussed is investor sentiment. Unconventional monetary policy creates a blanket over financial markets that boosts sentiment and is an eventual self-fulfilling prophecy. If a majority of market participants believe the market will go up, eventually it will.

The first premise of the argument is that record-low interest rates have given corporations room to expand credit at cheaper rates and subsequently boost earnings. After the financial crisis, most corporations decreased their labor forces and reined in investment. They were essentially in survival mode. When the dust cleared and the Federal Reserve enacted policy to drive down long-term rates, a sense of relief ensued.

Record-low interest rates allowed companies to take out large sums of credit at a much cheaper price than at any time before. Revenues were still suppressed due to weak consumer demand, but with credit, companies were able to continue operating in an efficient manner.

A reason that financial markets have been able to reach record levels, even as economic data remain volatile, is due to such corporate earnings. Interest payments have considerably dropped and earnings per share for the aggregate market have increased.

There is always the fear that easing policy at the lengths we have will eventually come back to bite us. The issue of inflation is as much tied to expectations as it is increased money supply.

Currently our money supply and central bank balance sheet are at historic highs. However, a weaker global growth picture has led to a selloff in inflation hedges, gold and Treasury Inflation Protected Securities.

As the economic picture improves, markets will focus on renewed economic strength and less on an inflationary spiral. Volatility will potentially ensue, but rising rates due to economic strength is a basic tenet of economies.

The last premise of the argument is the goal of reflationary policy and investor sentiment. The global economic environment does not support the levels we are currently at. Growth is slow and most economies are just trying to reach a bottoming-out point.

Reversing consumer and investor sentiment is difficult under these conditions. Central banks have been able to step in and fill the gap. By easing credit and spurring investment on a local level, such as housing and other long-term investments, consumer spending is on the rise.

As consumer spending improves, so does normal economic functioning and GDP growth.

Unconventional monetary policy is unsettling because we are in uncharted territory. It has allowed for a gradual recovery up to this point and succeeded in putting a floor under our economy. Although there is speculation on how it will all end, we must continue to do what we have over the past five years and simply trust the Fed.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

More from Opinion

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade

What's Happening in Video Games This Week: On the Road to E3

What's Happening in Video Games This Week: On the Road to E3