The summer the recovery went missing
Let鈥檚 see, what happened this summer? Easy question. The recovery went missing.
Ben Bernanke said so last week鈥r almost. He noted that the economy wasn鈥檛 quite as spiffy as he had hoped and that the Fed stands ready, willing, and able to provide more help.
The stock market liked the news. After falling for many days, it rallied 164 points on Friday. Gold was flat.
The New York Times reports:
THE American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic 鈥� more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve 鈥� fears of a second recession are growing, along with worries that the country may face several more years of lean prospects.
On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.
Yet even as vital signs weaken 鈥� plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent 鈥� a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt 鈥� a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.
This is where the Great Recession has taken the world鈥檚 largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.
鈥淭here are many ways in which you can see us almost surely being in a Japan-style malaise,鈥� said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. 鈥淚t鈥檚 just really hard to see what will bring us out.鈥�
Japan鈥檚 years of pain were made worse by deflation 鈥� falling prices 鈥� an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing 鈥� a downward spiral.
What kind of help can the Fed give?
Well, the only kind it has left. Team Bernanke has already given the economy as much conventional, monetary medicine as he could. Rates are at zero. They鈥檝e been at zero for two years. What more can you do?
The Fed has also used its unconventional tool 鈥� quantitative easing 鈥� to add $1.4 trillion to the Fed鈥檚 own balance sheet. It buys bonds with money it creates 鈥� out of thin air 鈥� especially for that purpose.
We wish we could do that. When the Fed wants to buy something it just snaps its fingers. Presto! New money. Money that didn鈥檛 exist before. How neat is that? You want a new car? You don鈥檛 draw on savings. You don鈥檛 wait until you鈥檝e got enough money. You don鈥檛 sit down meekly in front of the credit desk to see if you qualify for financing. You just write a check and tell the bank to cover it.
The Fed has already done quite a bit of quantitative easing. Normally, when it buys a bond with money it invented, the new money goes away automatically when the bond matures. So, the Fed has already said it would turn over its bond holdings, rather than let them mature and expire. And now Bernanke says he is ready to go further 鈥� by buying more bonds.
But the Fed is hesitating. It knows it can increase the potential money supply by buying more bonds. But it doesn鈥檛 know how much good it will do. So far, the banking system is not lending鈥nd not converting this monetary base into the kind of consumer and business loans that boost consumer prices.
The Fed knows, too, that investors may begin to worry about inflation. Bond buyers may begin to worry about a crash. At some point, these nagging worries could turn into a raging panic. But the Fed doesn鈥檛 know where that point is. Neither does anyone else.
And nobody knows whether or not it is possible to transmit just a little bit of inflation 鈥� enough to avoid deflation and persuade consumers to shop 鈥� by means of quantitative easing. It might be like a runaway train. Once you鈥檝e lost control鈥t鈥檚 too late. Markets now seem to anticipate lower inflation rates. The threat of higher levels could incite investors, consumers and business to get rid of dollars. This would nudge inflation rates up鈥nd build momentum towards even higher price hikes. Every little increase in inflation rates could intensify the desire to exit dollars and US bonds鈥� Who knows where the train would stop?
Meanwhile, President Obama says he鈥檚 not happy with the level of growth in the US economy. Which just goes to show how preposterous and absurd the whole discussion has become. Economic growth is a function of what people choose to do with their money. Sometimes they pursue growth. Sometimes they want safety. At present, they seem to prefer to play it safe. Households save. Banks stockpile cash. Businesses put expansion plans on hold and refuse to hire.
What sense does it make for an elected president to take issue with the express, legitimate and sensible desires of the people he is supposed to represent?
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