The Federal Reserve Bank under Ben Bernanke is hinting that it will pump billions of dollars into the economy by buying up U.S. Treasury bonds, even though the value of the dollar is already in the tank. The hope is that the loose-money policy will drive interest rates even lower on mortgages, corporate and other loans.
And the Fed hopes that by doing this pump priming, inflation, which has been largely non-existent, will begin to edge up.
So apparently the policy goal is to debase the dollar, even more than it is, in the hope that consumers will get hit by inflation.
It’s a good thing I’m not a “student of the Great Depression,” as Bernanke is so often characterized. Otherwise I might think these actions would drive us into one.
The first question to ask is whether there is any evidence, with businesses sitting on $2 trillion in the bank, that more money is the solution?
Yes, some businesses have complained that they have had trouble borrowing, but that may be more a result of the president’s much-vaunted financial reform and other Obama-era regulations that have made lenders skittish about handing out money. And will banks want to lend if the Fed is successful in driving down interest rates even more?
Both the administration and the Fed keep trying to resurrect Keynes by stimulating demand. But there are consequences to such policies that far outweigh the little, if any, economic bump they might bring.
Lots of countries hold American debt these days—in large part thanks to President Obama—and debasing the dollar reduces their holdings. It will be very bad for us if these countries decide they no longer want to subsidize our spending.
Plus, debasing the dollar robs Americans of their savings by reducing the value of that money.
It’s time for the administration and the Fed to quit trying to micromanage the economy. Economies tend to level off and begin an upward climb when (1) basic market-oriented policies of low taxes and limited and predictable regulations are adopted and (2) policies are embraced for the long term, not just the next news or election cycle. This administration has adopted neither approach.