Bernanke Will be Back
Posted by Michael A. Kamperman on June 23, 2011
The Federal Reserve affirmed that it plans to end its QE2 program on June 30. Chairman Bernanke admitted the economy was slower than forecasted. He believes the reasons are temporary and caused by things like the Japanese tsunami and the rise in oil prices. He did say that it is harder to qualify for a mortgatge. But he admits he is not sure about the direction of the economy and the Feds next move depends on the data. Let me assure you the economy is in the ditch and the federal government keeps digging itself into a deeper hole with needless delays in rescuing the economy. I stand by my prediction that before the year is over the Federal Reserve will implement QE3. First and foremost, the economy has slowed markedly in the last couple of months despite the implementation of QE2, which the Fed assumes added 750,000 jobs to the economy. Secondly, the extra Medicaid payments to the states also ends on June 30, along with some other stimulus plan spending. The pink slips are already going out. Plus, the bulk of the layoffs occurred between the fall of 2008 and the fall of 2009. Over the last few months millions of Americans have rolled off extended unemployment benefits with no job in sight. Their spending has also rolled off. And as the Fed Chairman has pointed out, it is harder to qualify for a mortgage in 2011 than it was in 2010. Finally, there is the uncertainty surrounding Greece and our own debt ceiling.
So what solutions are our venerable Washington politicians contemplating to solve these problems? The answer is spending cuts and tax increases. The Republicans want to cut spending now. Simply put, cutting spending means cutting jobs. The Republicans believe the economy will improve from a confident nation knowing Washington has put its house in order. They are wrong. This was tried twice during the Great Depression and failed miserably both times. But the Deomcrats want to raise taxes. Raising taxes does not raise up new tax payers. Part of this is class warfare. But most of it is some misguided notion that because the economy boomed under Bill Clinton and he raised taxes, then that means raising taxes doesn’t hurt economic growth. Simply put, they are wrong. Raising taxes is always a drag on economic growth. Bill Clinton inherited an economy emerging from a recession and he inherited the technology boom of the second half of the 1990′s. President Obama inherited an economy turning into a depression and there is no innovative boom creating millions of good paying jobs and Dellionaires at the present time.
So Bernanke will be back. He will have no choice. Those in positions of power in Washington don’t have a clue as to what to do. Sadly it’s not rocket science. World War II spending brought us out of the last depression. Keynesian economics works. Keynesian economics was the policy of both Republicans and Democrats all the way from World War II until 2008. The Republicans went predominatley Austrian in 2009 and for some strange reason the President has led most of the Democrats to follow them in 2010. Now they are arguing over who will cut the most effectively versus the who will cut the most compassionately. The urge to cut is driven by rhetoric that the bond markets will collapse and we will become Greece if we don’t take action now. The yield on the 10 year Treasury closed at 2.9% despite the collapse of the budget talks this afternoon. The bond markets know we will not become Greece without action, rather we will become Japan. The 10 year Japanese bond yield is around 1%. Japan’s economy is stuck in a deflationary depression. The difference between Greece and Japan is two-fold. First, Japan owes a lot more money and has fewer government owned socialist assets to sell. Second, Japan controls its currency and Greece doesn’t.
