We had sufficient warning that another economic downturn was coming. Economic statistics signaled a slowdown, gurus talked about it, and a burst debt bubble required it. Now the idea has become more widely accepted, but what can we do about it?
Lockhart Says the Fed Could Purchase Assets
The Fed wouldn't expand QE, would it? Well, it could, and it looks like the Fed is starting to prepare the country for it. In a speech the other day, Federal Reserve Bank of Atlanta Dennis Lockhart let the country know that the Fed is ready to act and has the means if the economy stalls. “If additional actions are required, I can assure you the Federal Reserve is not out of bullets.” What kind of bullets? “Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view."
"Treasonous" QE
Isn't expansion of the Fed's balance sheet what set off a commodity bubble and got the world to worry about the soundness of the dollar? We know that it is ineffective against debt deflation.
Rick Perry wants us to consider QE as treason. In the Texas governon's first day on the Iowa campaign, he said that it would be "almost treacherous, or treasonous in my opinion" for Federal Researve Chairman Ben S. Bernanke to "print money" before the 2012 election. We know that QE can't touch the economy, but it was nice of Rick to disqualify himself as a serious candidate.
The Real Treason
I wonder what Rick thinks about the real treason: Ronald Reagan's avowed goal to bankrupt the United States, just to make it impossible to finance Social Security and Medicare. Reduce taxes and forget promises about reducing the size of government. Sacrifice everything to ideology. That was the real treason, and Reagan's successors, like Rick, gleefully play their ignorant and hateful part.
Who accumulated the national debt after Reagan got the ball rolling? Nearly half of the national debt since Reagan was accumulated under the administration of George W. Bush. Bush's tax cuts for the wealthy, expanded Medicare, Wall Street bailouts, and endless war are the things that finally piled up the debt to dangerous levels, and they absolutely dwarf the debt added by the Obama administration.
The Real Cause of the Problem
Who accumulated the national debt after Reagan got the ball rolling? Nearly half of the national debt since Reagan was accumulated under the administration of George W. Bush. Bush's tax cuts for the wealthy, expanded Medicare, Wall Street bailouts, and endless war are the things that finally piled up the debt to dangerous levels, and they absolutely dwarf the debt added by the Obama administration.
The Real Cause of the Problem
The economic problems of the United States -- high debt, lack of competitiveness, unemployment, real estate glut -- all have their genesis in the lies and broken promises of decades of earlier administrations. Excuses were made to stimulate current consumption and fund pet programs, all at the expense of savings that could have funded investments in the future of the nation.
Will Congress Dare to Help?
More QE seems likely to accomplish nothing for unemployment and the real economy. What we need instead are structural changes, which we are unlikely to get. If the economic pain gets bad enough, Congress may finally align itself with the suffering electorate, forget its promises to reduce the deficit, and try some fiscal stimulation. Unfortunately, real structural change seems beyond Congress's intellectual depth. Also, expanding the federal budget is likely to bring the world's attention back to the ungovernable US debt load. Policy makers are in a bind.
A Familiar Historical Pattern
None of this is a surprise. Debt bubbles (balance sheet recessions) take years to work out, and there are no nice ways out. Worse, this debt cycle is taking place as the competitive position of the US is declining. The US is standing still or falling back, as hard-working people around the world continue to climb up the economic ladder and compete on the world stage. Inflated expectations in the US will continue to be frustrated as the nation pays the price for decades of waste.
A Period of Elevated Risk
It still looks like we face a long "muddling through" period, but the trouble with "muddling through" is that it leaves little room for error. The political impasse over the federal budget and S&P downgrade woke people up to the dangers of the out-of-control US debt load, and more people are looking for exit strategies now. They know that there is no guarantee that the disastrous debt trajectory will be corrected.
More QE will only stoke the fires of speculation. Macro risks seem elevated now, and it looks like a bumpy ride ahead. Treasuries and gold are already soaring. Some people are asking: "Is gold the only safe haven left?"
