WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, renewed his advocacy Thursday for Congress to confront “the urgent issue of fiscal sustainability” by enacting a plan to reduce the federal debt.
Mr. Bernanke repeated his familiar caution that Congress should not cut spending or raise taxes too quickly, because doing so could undermine the economic recovery, but said that a credible plan to make such changes in the long-term could spur growth by improving the confidence of businesses and consumers.
“Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible — indeed, they are mutually reinforcing,” Mr. Bernanke told the House Committee on the Budget, according to an advance copy of his prepared remarks.
Mr. Bernanke also repeated theFed’s assessment, released last week, that the pace of growth would increase modestly this year, but that the economy still faces significant challenges, including the depressed state of the housing market and the risk that problems in Europe would infect the rest of the world.
The Fed said last week that the economy would need its help for years to come and that it planned to keep short-term interest rates near zero through late 2014. Mr. Bernanke repeated that assessment Thursday, although he added that the economy was showing some signs of improving health.
“Fortunately, over the past few months, indicators of spending, production and job market activity have shown some signs of improvement,” he said.
Also last week, the Fed announced for the first time a formal interpretation of its Congressional mandate to maintain price stability and maximum employment. The Fed said that it was committed to maintaining inflation at about 2 percent a year.
Mr. Bernanke was likely to face questions about this statement from the committee later Thursday, both from those concerned that it does not give equal weight to the Fed’s responsibility for encouraging job growth, and from those concerned that it allows for too much inflation. Article Source: Yahoo Finance
Rep. Ron Paul sponsored this Congressional lecture on “What About Money Causes Economic Crises?”, the concluding lecture in a three part series on the basic principles of money for Congressional staff. As a continuing educational tool this lecture was filmed and is provided to the public. The lecture was delivered by Peter Schiff, CEO of Euro Pacific Capital and author of Crash Proof: How to Profit From the Coming Economic Collapse and How an Economy Grows and Why It Crashes. Mr. Schiff explains the fact that the interest rate is a price and that manipulation of that price results in real changes to the capital structure and structure of production within the economy, causing imbalances, booms, and eventually busts in the economy. His lecture also explores how government intervention through labor and employment policies results in diminished employment and an overall reduction in the standard of living.
Previous videos in this lecture series can be found here:
Economic data over the past weeks, punctuated by last week’s dismal employment reports, confirm the diminishing impact of the stimulus efforts orchestrated by the Obama Administration and the Federal Reserve. In what must be a huge disappointment to Keynesian enthusiasts, the record doses of both monetary and fiscal narcotics did not produce the desired results. In fact, the size and scope of the “recovery” of the past two years was weaker than would have been expected in a typical business cycle recovery without any stimulus whatsoever. Indeed our current recovery is the weakest on record, despite the biggest jolt of government stimulus ever administered. But despite the gathering gloom Austan Goolsbee, the Chairman of the President’s Council of Economic Advisors, argued over the weekend that the economy is on the right track and that the recent salvo of horrific economic reports were not significant. The poor numbers, he said, resulted from external factors like the Japanese earthquake and the downgrade of European sovereign debt. I don’t know if he really expects anyone to buy his story, but admitting you have a problem is the first step toward recovery.
In a sign that Mr. Goolsbee may have been getting increasingly uncomfortable with his job of economic propagandist, he abruptly resigned this week. He will be returning to academia where I’m sure he is hoping to avoid blame for the coming economic train wreck.
Although I have made these comparisons before, the parallel between drug addiction and the reliance on economic stimulus is just too strong to ignore. And as with drug addition, an economy builds up a tolerance. Each time the government successively stimulates with printed money or deficit spending, ever larger doses are needed to achieve the same result. Lest we forget, coming into the Crash of 2008, the economy had been on the receiving end of years of over stimulus. President Bush and Alan Greenspan never fully weaned the economy of their shock treatments that followed the dot.com crash and the shock of September 11th.
This time around, the stimulus-fueled recovery is so mild that the economy is already relapsing into recession before the Fed has even begun to tighten. This puts Bernanke in a very difficult position. He either follows through on his loudly trumpeted plans to end quantitative easing this summer, or abandon those plans in favor of more stimulus. Both choices are unappealing.
Given the current economic weakness will any additional deterioration, that will surely result from a withdrawal of stimulus, be politically viable? Real estate prices are already at new lows and unemployment refuses to diminish even with the punch bowl fully spiked. What would happen if it contained only cranberry juice?
To avoid these short-term consequences, the Fed can instead admit that the recovery cannot survive unaided. Bernanke would have to reverse his previously optimistic outlook, and launch QE3 even as QE2 barely pulls into port. But why would anyone believe that the “growth” that results from QE3 will be any more durable and robust than what resulted from QE1 and QE2? Economists like the stimulus-loving Paul Krugman will surely argue that that the stimulus has been too small (like $5,000 in annual deficit spending per American is a trifling sum). But to believe that the next dose will do the trick borders on sheer insanity. When QE3 comes and goes (which I’m sure it will) the Fed will face the same choice that it faces today, yet with even greater consequences. It’s a self-perpetuating cycle that ends in disaster.
Just like a Hollywood movie, each QE sequel gets progressively more ridiculous (my apologies to Johnny Depp). The government needs to admit its mistakes and write a completely different script. This time the story line must allow for a real restructuring. Real estate prices must fall further, and many financial institutions holding bad mortgages must fail. This means investors, creditors, and depositors will lose money. Labor and capital must be re-allocated away from services into goods production. That means jobs must be lost in government, retail sales, finance, health care, and education; and jobs must be created in technology, manufacturing, textiles, mining, energy, and agriculture. This guarantees major short-term pain. But breaking an addiction is not easy. Those who say it is are living in a fool’s paradise.
This transition does not require any positive action from government. All it needs to do is simply get out of the way. That does not mean there is nothing the government can do to help the process. It can remove as many regulations and taxes as possible that inhibit market forces from working their magic. But this requires a completely different mindset among our elected officials. They will need the courage and knowledge to level with the American people, and do what is in our nation’s economic interests, not simply what is in their own political interest.
Foreign governments too must get out of the way and let market forces work. Their support for the U.S. dollar must end. If they do, U.S. consumer prices and interest rates will rise, as they must. If the Fed tries to combat the effects of a falling dollar with more QE the dollar will fall even further and consumer prices will rise even higher. The cycle will either end with the Fed as the only buyer of all U.S. dollar denominated debt (wiping out the value of the dollar) or a Fed engineered rate hike that brings the cycle to an end. Both scenarios are catastrophic, but the latter at least offers the possibility of redemption.
The same experts who did not see the 2008 financial crisis coming also fail to see the world in these stark terms. And while it gives me no pleasure to forecast the demise of the U.S. economy, I hope that at least the reputations of these “experts” will sink with it.
Bernanke Focuses Anew on U.S. Debt
The Great Jubilation of 2012
Fed Chief Focuses Anew on U.S. Debt
WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, renewed his advocacy Thursday for Congress to confront “the urgent issue of fiscal sustainability” by enacting a plan to reduce the federal debt.
Mr. Bernanke repeated his familiar caution that Congress should not cut spending or raise taxes too quickly, because doing so could undermine the economic recovery, but said that a credible plan to make such changes in the long-term could spur growth by improving the confidence of businesses and consumers.
“Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible — indeed, they are mutually reinforcing,” Mr. Bernanke told the House Committee on the Budget, according to an advance copy of his prepared remarks.
Mr. Bernanke also repeated the Fed’s assessment, released last week, that the pace of growth would increase modestly this year, but that the economy still faces significant challenges, including the depressed state of the housing market and the risk that problems in Europe would infect the rest of the world.
The Fed said last week that the economy would need its help for years to come and that it planned to keep short-term interest rates near zero through late 2014. Mr. Bernanke repeated that assessment Thursday, although he added that the economy was showing some signs of improving health.
“Fortunately, over the past few months, indicators of spending, production and job market activity have shown some signs of improvement,” he said.
Also last week, the Fed announced for the first time a formal interpretation of its Congressional mandate to maintain price stability and maximum employment. The Fed said that it was committed to maintaining inflation at about 2 percent a year.
Mr. Bernanke was likely to face questions about this statement from the committee later Thursday, both from those concerned that it does not give equal weight to the Fed’s responsibility for encouraging job growth, and from those concerned that it allows for too much inflation. Article Source: Yahoo Finance