Tuesday, August 10, 2010

The False Fed Savior - Monetary policy can't make up for failed fiscal and regulatory policy.

From Opinion at The WSJ

As the Bible says, we know that our redeemer liveth. And on Wall Street and Washington these days, the economic redeemer of choice is the Federal Reserve. When the Fed's Open Market Committee meets again today, markets are expecting a move toward easier money that is supposed to prevent deflation, re-ignite a lackluster recovery, revive the jobs market, and turn water into Chateau Petrus.

It's a tempting religion, this faith in the magical powers of Ben Bernanke and monetary policy, but it's also dangerous. It puts far too much hope in a single policy lever, ignores the significant risks of perpetually easy money, and above all lets the political class dodge responsibility for its fiscal and regulatory policies that have become the real barrier to more robust economic growth.

The latest impetus for easing comes from July's weak jobs report, which has fed the growing fear that the U.S. is following Japan into a deflationary spiral. Deflation—a falling price level—is as undesirable as inflation and is best avoided. [ Remember. If we do get deflation, our debt will cost us more and more dollars! See the cartoon below. – JS ]

image But is deflation really a clear and present danger? While the consumer price index has declined in  the last three months, the overall price level rose by 1.1% over the 12 months that ended in June. Commodity prices in particular have remained strong, reflecting higher demand as the global economy continues to recover, especially in Asia. Average hourly earnings are also slowly rising again in the U.S., assuming you have a job. Even the biggest deflation-phobes count the odds of it occurring at only one in four.

[ But if we get deflation, Katy bar the door. Look at the spiral above and decide what’s coming next. – JS ]

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Related cartoons

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