Federal Reserve Chairman Ben Bernanke recently spoke of a slowing world economy at the annual fete of world economists in Jackson Hole, Wyo. His speech was the typical measured prose of someone whose choice of adverbs has the capacity to send markets diving. However, to an experienced listener, two interesting tidbits emerged.
The first of these should be familiar to readers of this column: a recognition that the world economy is slowing. This admission is important because a slowing world economy, as opposed to slower growth in, say, Europe, suggests increased risk of a recession here at home. I have said since May that a U.S. recession is nearly certain, and Bernanke’s remarks suggest that more economic models are saying the same thing.
The second important deduction from Bernanke’s speech is that he believes that quantitative easing, a stimulus tool used twice before, might soon be deployed again to boost the economy.
Bernanke said previous bouts of quantitative easing were successful when weighing the balance of evidence. I am sure he has research to back that up, but I’m afraid the benchmark for success today is lower than most of us would prefer.
What worries me most about another round of Fed actions is that the economic models used in these policies also argue that a government’s debt acts as a counterbalance to its success.
Explaining this adequately involves a fairly sophisticated argument that includes some heavy-duty math. Suffice it to say that Federal Reserve purchases of additional securities will boost the nation’s money supply, potentially driving up demand for goods and lowering unemployment. Of course, that ultimately leads to inflation.
Normally, this inflation would be mild—perhaps barely noticed. But flooding today’s economy with money means price increases would have no real curbs. More worrisome, inflation combined with a large debt constrains growth. The dismal possibilities haunt any Fed action.
We have added almost $2 trillion in debt since the last quantitative easing in 2010. This means the success of any new effort will be far more muted than the last one—and does anyone remember how much that reduced unemployment?
I fear we are at a point where we are largely out of policy choices. Every stimulus action, from either the Federal Reserve or Congress, will be muted by the already large debt hanging over us.
There is nothing in our economy to suggest rapid growth is around the corner. We can wait. Although the economy eventually will recover, that will take years. We could try an enormous deficit reduction, but even a 20-percent cut in spending will leave us a debt requiring a generation to pay down.
This is a bad spot to be in.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.