Wednesday, May 14, 2008

The Gospel of Impending Doom

 
The Federal Reserve is pouring hundreds of billions of excess dollars into the economy to hold off an economic crash. The longer it does this, the worse the resulting inflation will be; more importantly, however, the longer it pursues this radically irresponsible policy, the worse the recession will be when a new Federal Reserve Board must crush the money supply long enough to drain out the staggering greenback overhang. Interest rates, which will already be rising because of inflation expectations embedded in them, will skyrocket because interest rates are the price of money, and when the supply of anything contracts, its price goes up. Business investment, already laboring under tight credit conditions, will grind to a standstill, as will consumer spending on anything other than basics, which will absorb a greater and greater share of income in the spiral of accelerating inflation caused by the almost incomprehensible oversupply of money progressively eroding the purchasing power of each dollar circulating in the economy.

On the international front, as the dollar continues its inexorable plunge into Second World currency weakness, U.S. exports to other countries will rise as our goods become cheaper overseas, and foreign imports to the United States will become more expensive. That has two sour notes. First, as imports become more expensive on American shelves, the domestic substitutes right beside them on the shelves will rise in price by the so-called "substitution effect," fed as it will be by the excess money that will fuel the demand-pull inflation at the retail level. Second, as Americans buy fewer imports, foreign reserves of dollars, which are the means by which our government, our businesses, and our households have been able to borrow so much money for the past several decades, will begin to dry up; and with the U.S. government spending in stupendous excess of the tax revenues it draws, the U.S. Treasury in the years ahead will suck up what little there will be of foreign capital available for lending, leaving both households and private businesses with virtual bread crumbs of lendable funds, especially once the Fed begins the long, gruesome process of letting the economy slowly absorb in real output gains what will ultimately be the trillions of dollars in excess liquidity poured in by the Bush Administration's Federal Reserve.

All of the righteous, legitimate, and perhaps even understated condemnation of the Bush Administration and its Federal Reserve aside for a while, the pertinent questions on most people's minds revolve around what is to come; and by no means are the answers pleasant. Even under the most responsible, intelligent, and take-charge President—of which none appear to be on hand for the up-coming election—the economy and its constituents will suffer, and the suffering will be severe.

No, the United States economy is not in a "recession," yet, despite the premature squealing of quite a few people. Although some parts of the country might already be experiencing negative economic growth, according to the latest figures released by the Bureau of Economic Analysis of the Commerce Department, the overall economy actually grew in the first quarter of 2008, albeit at an anemic rate of just 0.6 percent, matching the growth rate for the final quarter of 2007; and, although the Commerce Department is notorious for revising such GDP growth rate numbers several times, the signs simply are not there of a widespread recession underway for the U.S. as a whole. Americans have not seen a severe recession in more than a generation. The last bad one was caused by the contractionary monetary policy of the Federal Reserve under the leadership of Chairman Paul Volker, President Jimmy Carter's appointee; Volker's Fed aggressively clamped down on the money supply to drain out the excess money that had been building at a greater or lesser pace for more than a decade. Volker did not let go until not only the inflation had abated, but so too had the far more important expectation of future inflation. Recessions since then have been relatively short and mild by comparison, and the "recession" that heralded the beginning of the current Administration was not a recession by the technical measure of two consecutive quarters of negative real GDP growth, but it was certainly more than enough of a pretext for George W. Bush and his Republican allies in Congress to get their way with drastic tax cuts to "stimulate" the economy, a siren call the GOP has used in the past, most notably at the outset of the Reagan years and, before that, near the end of the Eisenhower Administration. Unlike Ronald Reagan and George W. Bush, who led their party's parade to the trough of wildly generous tax cuts for the rich, Eisenhower resisted the tax cut bleatings of his fellow Republicans and, in so doing, was able to deliver several years of balanced federal budgets, unlike either Ronald Reagan or George W. Bush. Of course, in all fairness at least to the current President of the United States, few are those even among the professional apologists for Mr. Bush who would accuse him of being the latter-day incarnation of President Eisenhower in fiscally responsible leadership, much less in statesmanship and general intelligence.

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