Federal Reserve Chairman, Ben Bernanke, during a rarely-held  interview with the media was unusually candid about the future of the U.S. economy.   His  remarks were precipitated by a widely held misunderstanding among many Americans concerning The Fed’s intention to inject $800 billion into the economy.  In a time of burgeoning federal deficits and an ever-increasing level of U.S. National debt, Chairman Bernanke was  quick to point out that none of the $800 billion dollars would be added to the deficit.  The funds would come from existing reserves, and would be used to purchase U.S. government securities.   In essence, the Fed would inject new cash into the nation’s money supply by purchasing securities.  Chairman Bernanke’s bold move shows that economists have learned a valuable lesson from the Great Depression of the 1930s.  That lesson is quite simple; the best way to fight the specter of deflation caused by a large drop off in economic activity is to increase the nation’s money supply.  In other words, the best way to fight “deflation” is to take actions that are “inflationary”.  Due to the independence of the Federal Reserve System from politics, Chairman Bernanke was able to act in the best interests of the American people without worrying about another Republican filibuster.

Although it is outside the purview the the Federal Reserve, Chairman Bernanke was asked when he thought the nation’s unemployment rate would show significant improvement.  Mr. Bernanke stated, without hesitation, that it would probably be four or five years before the unemployment figures would drop back into the five to six percent range.  This answer, although shocking to most Americans and vehemently denied all U.S. politicians, is probably very close to the truth.   The sad fact is that the economy needs to grow at a rate of about 2.5% per year just to keep up with new workers entering the economy.  For the year of 2010, economic growth will likely come in around 2.0%.  This does not even take into consideration the current 8 million jobless individuals that are still looking for work.  In order to keep up with new workers entering the economy,  and to supply  jobs for the 8 million workers that are currently unemployed, the economy would have to grow at a rate of around 5% to 6%.    In light of the sad economic state of affairs, it is no wonder that Chairman Bernanke is predicting a very, very long and extended period of hard  times for millions of Americans.

When asked about the long-term effects of the skyrocketing level of national debt, Mr. Bernanke was no less candid.  He simply said that the current level of growth in the national debt is unsustainable.  Within a relatively short period of time, say five to ten years, the interest alone on the national debt will be over a trillion dollars a year, leaving almost nothing left for social programs, or even for national defense.

Chairman Bernanke is largely free from the political wars being waged in Congress, therefore is free to speak his mind without fear of political reprisals.  The Chairman has taken the time to look the American people straight in the eyes and tell them that they are on the “eve of destruction”, that debt-reducing actions must be immediately taken if disaster is to be avoided.   In spite of Chairman Bernanke’s dire words of warning, what is Congress poised to do?  They want to increase (not decrease) the national debt by extending the Bush Tax cuts, and at the same time increase (not decrease) the national debt by renewing unemployment benefit extensions.  Are the politicians listening at all, or is it they just don’t care?

Rich

Shortly the Thanksgiving holiday will be here, the Christmas season will move into high gear, and the year of 2009 will close its books for good. For millions of Americans 2009 will be remembered as a year of high anxiety and looming uncertainty. The economy at the start the year was in a free fall, near to total financial meltdown, and shedding jobs by the millions. By year’s end, the economy has pulled itself back from the precipice of disaster, re-established a degree of financial stability, and found a new equilibrium level of production and employment. Unfortunately, the new economic equilibrium levels are far short of those needed to make even a small dent in the unemployment rate. Although the Economic Stimulus Package has had a short term impact with programs such as Cash for Clunkers and the $8,000 tax credit for first time home-buyers, these programs have not been enough to effect economic growth in any significant way.

What will the year of 2010 have in store for the beleaguered American economy? To start off with, most economists believe that economic growth will stall from the 2.5% rate experienced during the last two quarters of 2009 to around 1.0% throughout most of 2010. This stalling will be largely due to the winding down of government supports that were present in 2009. Federal Reserve Chairman, Ben Bernanke, has warned that tight credit and a weak job market will make consumers cautious in their spending. In fact, many economists are now predicting that the jobless rate could climb to 11 percent by the middle of 2010, before beginning a very slow descent. Some economists have gone so far as to say that it may be four years or more before the unemployment rate returns to more normal levels.

All these dreary economic predictions spell bad news for the Obama Administration, which has been overly-optimistic about the ability of the American economy to rebound from the mess it inherited from the prior administration. There is little doubt that continued high unemployment rates will have a major impact on the 2010 mid-term elections, and may hamper Obama’s ability to accomplish other major campaign initiatives. The truth of the matter is that there is very little the Obama Administration (or any administration) can do to effect the economy in any significant way without changing the American capitalistic system. At this point, the best governmental action is “no governmental action”. The American economy must be left alone, with no further stimulus programs, to find its way back to prosperity. Time has come to put Adam Smith back in the drivers seat, and to let the “invisible hand” guide the economy back to good health.

—Rich