Fixing the Economy

We are seeing some sell-off in the market today because the quick fixes put in by governments and central banks are not working. A lot of authors, including myself, have written a lot about how Federal reserve policies alone and government stimulus are not going to pull the economy out from recession. In fact, by design such policies create more confusion and more volatility in the markets. For example, treasury market is going into bubble territory because 1) US treasury is assumed to be risk-free. 2) Banks can borrow money at 0.1% from Fed and invest in treasury to earn 0.6-3.0% risk-free depending on the duration. And lastly 3) There is an assumption of Fed itself providing the backstop for treasury market in case of disruptions. Even though Fed as of now has stopped buying treasuries but market believes that it can force it to do so if need be.
These are exactly the reasons why M1 money supply has not increased so much even after unprecedented liquidity increase from Federal Reserve. Banks do not have any incentive to lend money as long as the differential between their borrowing costs (Discount window lending and interbank lending, where both these rates are set by Federal Reserve) and yields on US treasuries stays large enough for banks to pour money into treasury market. But Fed is scary of raising rates because it thinks that stock market will not digest it easily. I agree with it in the short-term, may be 3-5 market sessions, but then market will return back to fundamentals.
By increasing the rates, Fed will force banks to go back to their core business of lending money to real customers.
Also, we have to keep one more thing in mind. The concept of money itself was invented to make the exchange process in economy easier. Money is a medium not the end itself. So economy has to grow based on other factors. Though research shows that manipulating the money supply has its effects on economy and thus in-turn on inflation as well. But I am postulating that this effect is more pronounced on reducing the money supply to curb economic growth. It does not work so well in the other direction. By increasing the money supply we can not stimulate growth beyond a limit. The reason is simple. In the former case, economy itself is growing and money is needed for transactions. By reducing money supply we can cut down on some transactions which do not have high value (or return in simple terms). Thus risk aversion increases slightly with reduction in money supply which in turn brings down growth rate. On the other hand, later case has different dynamics. By increasing the money supply we can reduce the risk aversion to some extent thus having some stimulating effect on the growth. However, it is impossible to generate transactions simply by increasing the money supply. Transactions will increase only if economy by "itself" is strong.
So here are few methods to make US economy strong in itself.
We have to create incentives for businesses to innovate. This involves giving them incentive to hire highly skilled work force easily. That in turn means making visa and immigration process for skilled workers easy and more streamlined. By hiring these workers, US companies will not only acquire competitive edge but will also need to create lower end jobs. For example, if a company hire 20 high skilled workers then it might need more office space (construction jobs), more maintenance (janitorial staff, security staff etc.) and more technology support. This cycle becomes self-sustaining as new workers will be willing to invest more in the country in the form of taxes, buying houses and buying other amenities. The only way for US government to make US economy grow at this point is to reform the immigration policy in favor of hiring and retaining highly educated and skilled workers. This will also make US companies more competitive and future-ready in a global economy.
We also have to invest in research and development of future technologies and processes. Government should create incentives for private sector to increase spending in this area by providing more tax reliefs and also by increasing government's own spending in these areas through grants.
We have to realize one more economic reality. Economy always grows "top-down" and not "bottom-up". We need airports and vast number of airport employees not because we could create those jobs first but because we created the aeroplane in the first place. By trying to focus government's approach on saving or creating lower-end jobs (e.g. hourly jobs in construction etc.) at the expense of tightening policies for higher-end jobs (Engineers, MBAs from foreign countries) we'll be doing more harm than good for the long term health of the economy. Government should try to create policies to support growth at the top that will automatically trickle down. How fast it trickles down can be controlled by monetary policies but focus to promote growth at the top is essential. This is the only way to have economic growth.
In the mean time, I am shorting treasuries because it's trading at very high price right now. Once way for retail investors is to buy TBT. If you want to be more aggressive then you can buy TYO and TMV. However, I am not a big fan of 3x leveraged ETFs. PST is a play for shorter duration treasuries. I would stay with TBT though.