Washington is Turning to Talk to Cure the Economy
Posted by Michael A. Kamperman on June 15, 2009
Talk of green shoots has led to denial and self delusion in Washington. The green shoots are a mirage. Last May 1 in 2 college graduates had a job offer before graduation. This year the number is 1 in 5. Yet the Federal Reserve is now concerned that the bond markets are concerned about potential inflation. Hence, the Fed has signaled there are divisions in their ranks and that they may back off on increasing the amount of quantitative easing. The markets are controlled by hedge fund managers who are just as happy to make a buck by betting down as up. I seriously doubt the wisdom of the Fed following a group of speculators that pushed the internet bubble and the subprime real estate bubble. The recent rise in commodities prices is based on a falling dollar, fears of renewed inflation, and strong buying of commodities from China. The dollar is currently considerably higher against almost all other major currencies than it was 12 months ago. The fears of inflation come from people whose whole life experience is from an inflationary world, and they don’t understand that we have left that world behind for now. Finally, China is buying far more commodities than it is using. At its current pace there will soon be no place left for China to store any more stuff. Both Chinese imports and exports fell sharply again in May, which is a sign of a contracting economy. It is not yet clear if the Chinese want to turn their wealth into hard assets rather than paper assets, or if they misjudged the seriousness of the economic crisis and thought the global stimulus bills would lead to a V-shaped recovery.
Bernanke hinted at his new attempt to rely on talk rather than action when he called on Congress to get its fiscal house in order. He then confirmed the turn to talk when the Federal Reserve leaked to the Wall Street Journal that a shift in policy away from further quantitative easing is in the works. Assuming this recent effort at jawboning and policy shifting doesn’t work, will the Fed actually raise rates as some so called experts are suggesting? Back in the Great Depression the biggest policy mistake that was made was continually doing too little, rather than too much.
Bernanke is one of the world’s foremost authorities on the Great Depression. He has given speeches that have called for dropping dollars from helicopters if necessary to ward off deflation. But it is not enough just to have head knowledge of what to do. As a leader, Bernanke needs the will to go in a direction even if many disagree and are against him. Talk will not get the country out of the new great depression it has entered. Hoover initially tried talk and moral persuasion and it had little lasting effect. The velocity of money has collapsed. This economy needs much more quantitative easing and it needs it now. It will be too late to ward another major leg down in the economy if Bernanke waits for clear evidence the economy is still rapidly contracting. The Obama administration needs to put some political capital on the line and go to the wall for more economic stimulus. If the economy keeps sliding into next year than President Obama’s political future might mirror the political future of President Hoover in the early 1930’s.Fed actually raise rates as some so called experts are suggesting? Back in the Great Depression the biggest policy mistake that was made was continually doing too little, rather than too much.
