Geithner and Bernanke Getting Weak Kneed at Wrong Time
Posted by Michael A. Kamperman on June 3, 2009
If you can’t handle the heat, get out of the kitchen. Carping and criticism come with the territory of leadership. Geithner says “we have a strong independent central bank” and “the U.S. does not intend to monetize the debt.” This message for the Fed comes after Geithner got chewed on in China for U.S. policies that are perceived by some Chinese not to be in the best interests of their large quantity of U.S. Treasury holdings. Then, Bernanke says “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Pressure and protests from China, bond vigilantes, followers of the Austrian School of Economics, and other worry warts should be ignored. Unfortunately, it appears Geithner and Bernanke may be doing something more than throwing these misinformed groups a bone. It appears there could be a change in U.S. policy to ease off of both quantitative easing and significant further stimulative spending by the federal government. I pray this is not so.
We are in a debt-induced asset bubble popping deflationary depression akin to the one in the 1930’s. The New Deal eased some of the pain during the Great Depression, but it certainly did not come close to ending it. World War II ended the Great Depression. To country decided that winning the war was more important than anything, and no consideration would be put in front of the war effort. To fight the war, the U.S. government spent the equivalent in today’s dollars of $8 trillion per year for four years in a row. The current hodge-podge stimulus plan of $789 billion is spread out over two years. Furthermore, much of the direct spending is simply plugging holes in state budgets that cannot meet basic unemployment and Medicaid expenditures. The U.S. government entered World War II with a relatively low amount of debt compared to U.S. GDP. It also had a nation with a strong savings ethic and not many goods to spend money on. Hence, it was able to internally fund most of its cash needs. Today, the U.S. has a much higher debt to GDP ratio and we are just in the process of being forced to relearning our savings ethic.
China would benefit much more from a resurgent U.S. economy than it would from a country that took on austerity measures to keep its currency high. Besides, China is the biggest currency manipulator in the world and doesn’t even allow the yuan to float freely. And China doesn’t have enough money to lend us to solve our problems anyway. We need to go down a different path whether they approve or not. The bond vigilantes are worried about a coming surge in inflation. With unemployment rates soaring and capacity utilization rates plummeting, exactly what inflation are they talking about? For those worried about a collapse in the dollar, the question is collapse against what, the yen, the pound, the euro? Those societies face bigger challenges than we do. And we face huge challenges. The next major bailout will probably be the State of California. We need much more in the way of quantitative easing and we need much more in the way of stimulus spending. Without it we will repeat the experience of the Great Depression of the 1930’s. It only ended when unrestrained spending to win the war started after Pearl Harbor. We are facing an economic Pearl Harbor and this is no time for leaders that don’t have the stomach and the intestinal fortitude to lead.
