Ben, Please Just Stop Printing Money….
Yesterday, Federal Reserve Chairman Ben Bernanke held a press conference for financial reporters:
Could more stimulus be on the way?
Federal Reserve Chairman Ben Bernanke certainly left the option on the table Wednesday, making perfectly clear that he stands ready to do more should the U.S. economy take a turn for the worse.
“In case things get worse, we are prepared to protect the U.S. economy and financial system,” Bernanke told reporters at a press conference.
It was a point he reiterated several times and a sign that many outsiders took to mean the Fed has left the door open on a third round of asset purchases known as quantitative easing, or QE.
“Mr. Bernanke’s press conference surely left few doubts that the Fed will take more aggressive action and renew QE if the economy fails to perform as they expect,” Ian Shepherdson, chief U.S. economist for High Frequency Economics, said in a note to clients.
Meanwhile, University of Pennsylvania Economist Justin Wolfers tweeted: “I read the Fed as saying: One more bad jobs report, and we’ll do more.”
So Ben’s going to go back to the printing press if we have one more disappointing jobs report. He’s going to initiate another round of quantitative easing (QE), which is basically creating money out of thin air. It will be yet another round of quasi-stimulus spending which is basically trying to throw more money at the economy, hoping and praying that it does something. The best name for this kind of economic thinking is “print and pray” economics.
Most Keynesians claim the result of our economic problems is the lack of “aggregate demand”. They point to the fact that the number one problem most small businesses are facing is a lack of customers. However, they fail to look at the reasons why people are not spending as much money as they did five years ago. Most American families had their wealth in the housing market and/or were directly employed in it. But the housing sector was nothing more than an asset bubble as investors took advantage of the cheap and easy credit the Federal Reserve was offering and they poured their money into housing.
After all, in the minds of most people, real estate never loses its value because population is always increasing and the amount of available land stays constant. However, just all asset bubbles do, this asset bubble popped. American families lost a large portion of their net worth in a matter of months and years. As the housing market came to a halt, many construction workers and others whose livelihoods depended on housing lost their jobs, which turned into a ripple effect throughout the economy. Those Americans who are lucky enough to be employed are still trying to save up their money to rebuild their net worth from the Great Recession. No matter how much newly created money you inject into the economy, people will not spend again until they feel comfortable doing so.
Now this money printing will likely have some negative consequences. It will likely lead to a rise in food, energy, and other commodity prices as bubbles are created in those. That will diminish the disposable income available to those few people who are spending and will penalize those on a fixed income such as the retired and disabled. Plus, it will punish savers by forcing interest lows artificially low. It also may lead to an increase in housing prices, but it would be merely be the reinflation of the housing bubble and will not end well.
QE advocates may dismiss concerns about inflation by saying that US treasury yields are at or near record lows, which is true. However, this is not because of the strength of the US, but the weakness of the rest of the world. Europe is on the verge of economic collapse. China is appears to be a paper economic tiger. Japan is still not a good long term investment due to its aging population and lack of capital influx. The US is, economically, just a sick man compared to the dying men of the rest of the world. Once Europe sorts itself out and the rest of the emerging states like Brazil for example grow stronger, the weaknesses of the US’s long-term economic situation will become more and more apparent.
What We Really Need To Do?
We need to first stop the stimulus spending and money printing. We need to let the housing bubble finish deflating and return to more stable levels. We also need to institute a flat income tax of around 17% or so and while I would prefer to abolish the corporate income tax and treat corporate profits the same way LLC profits are treated, which is they are passed through to their owners and taxed as income, that won’t happen. We need to bring the corporate income tax rate down to 17% in order to be competitive with the rest of the world. This will increase real investment in real capital to get the economy going again. We need to have economic growth based on producing things, not cheap and easy credit created out of thin air. It will lead to more sustained prosperity for all and more sustainable economic growth in the long term.