Tuesday, August 16, 2011

Doubling Down on Zero

The Federal Reserve Open Market Committee announced that it will keep it's short term interest rate target near 0% for another 24 months.  That's in addition to the 32 months it has hovered at that level.  And they blame chairman Greenspan's decision to keep rates too low too long early last decade for fueling a fateful bubble in real estate.  Noman can't wait to see what happens in a few years.

The WSJ's editors have their doubts about the wisdom of inviting inflation, which is what the Fed is doing.

The larger error is to assume that monetary policy will save the economy from its current malaise. That's the latest mantra from the same economists who told us that $1 trillion in spending stimulus was the answer in 2009. Since that has failed, we are now told the economy needs a bout of extended inflation to reduce our debt burden. Harvard's Kenneth Rogoff says the Fed should allow a "sustained burst of moderate inflation, say, 4-6% for several years." 
There's no doubt that inflation can erode the value of money and debt. Argentina tries this every few years. Debtors and "millionaires and billionaires" (to borrow a phrase) do fine, but the middle class pays a huge price in a debased standard of living. Once you encourage more inflation, it's also hard to stop at 4%. In today's global economy with investors already suspicious of U.S. economic management, an overt declaration of such a policy might trigger a wholesale run on the dollar. 
Mr. Bernanke and his Fed majority haven't gone that far, despite doubling down on zero yesterday. But if monetary policy by itself could conjure growth, or compensate for bad fiscal and regulatory policy, we'd already be booming.
Noman also has his doubts, and worries for America's future.  Short of slashing tax rates and government spending, privatizing education and every aspect of government that can be done at levels closer to the problem, and encouraging people to care for their families, stay together, work together and pray for sustenance, Noman isn't sure what to do.

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