Jun 6, 2009
Recall the Stimulus
Testifying before the House Budget Committee this week, Ben Bernanke said that when the time comes, the Fed will raise interest rates in order to stop inflation from building in the next recovery. He also asked for "fiscal balance" to sustain financial stability. On the surface -- in terms of keeping prices stable and restoring value to the softening U.S. dollar -- this is positive. Surely Bernanke wants to do right for America, and he's giving it his best shot.
But when you talk to traders and economists, the whisper story is that Bernanke and the Fed are no longer truly independent of the Obama White House and Treasury. As a result, Bernanke will not be able to slow down the printing presses and gradually lift the near-zero target rate in a timely and effective manner. Already the Fed has created more than $1 trillion in new cash, and the M2 money supply is growing at its fastest pace in 25 years.
This monetary explosion explains what's really driving the dollar down and Treasury rates up (alongside rising gold and oil prices). It's not huge budget deficits, but the growing fear that a less-than-independent Fed will keep pushing new money into the financial system in order to fund Obama's liberal spending policies.
Rising inflation and interest rates are always a monetary problem. When Dick Cheney said a few years ago that deficits don't matter, he was basically right. There is no clear relationship between budget deficits, inflation and interest rates. In fact, for most of the'80s and '90s, and much of the 2000s (excepting the 2003-05 bubble), interest rates and inflation fell while deficits averaged over $200 billion a year and got as high as 6 percent of gross domestic product at some points. This is because Paul Volcker and Alan Greenspan restrained money-supply growth in a non-inflationary manner..
Economic blogger Scott Grannis says, "Recall the stimulus." Professor Russell Roberts of George Mason notes that only $36 billion of the stimulus has been spent through May, out of a total $787 billion. And USA Today reports that $209 billion in countercyclical automatic safety-net stabilizers -- which is apart from the stimulus package -- has already been spent on unemployment insurance, food stamps, Medicaid and early Social Security retirements.
On the eve of recovery, with all this prior spending, why on earth do we need more?
Policy analyst Dan Clifton tells us that the $200 billion spending increase scheduled for 2011 to 2019 should definitely be rolled back from the Obama stimulus package, before it's built into the current-services spending baseline. And let's not forget that the Obama Democrats already passed a $400 billion omnibus spending bill for 2009. So anybody in Washington who is serious about spending and deficits can save hundreds of billions of dollars by rolling back the stimulus package and TARP. The financial system is healing, and banks want to pay TARP down anyway.
Here's the moral of this story: Excessive Fed pump-priming and over-the-top federal spending is what matters, not the budget deficit. If we keep paying people not to work by piling on more transfer payments and government subsidies, economic growth will suffer mightily. And if the Fed keeps buying bonds issued by Uncle Sam, inflation will ratchet higher.
People, Obama, Congress, are you listening? Roll back the unnecessary stimulus, and restore the Fed's independence.