By Michael McCune
Slowing Economy Faces Major Obstacles
Federal Reserve Chairman Ben Bernanke remarked on the U.S. unemployment rate early Monday to the National Association for Business Economics. He noted the economy must grow much more quickly than is its current pace to make any dent in the percent of unemployed individuals in the U.S.
Bernanke’s remarks, closely followed by the market leaders, quashed any expectation the Reserve would begin to rein in its runaway printing exercise. In his remarks, Bernanke noted U.S. companies laid off many more workers “than was necessary” during the recession. To relieve the stress on employees, companies might have hired back more people than the “recovery is able to handle” based on the pace of the recovery. “Progress on the unemployment front will probably stall,” he said.(1)
GDP grew by just 1.7% last year, even with a 3% growth rate in the fourth quarter and is slowing once again in the first part of 2012. The 1.7% growth rate is too small to move the unemployment rate much lower. Following Bernanke’s misguided policies, the Fed has reduced interest rates to near zero for the past three years, purchased some $2.3 trillion in debt securities to move borrowing costs lower to spur faster growth and revive the economy’s sluggish pace. None of those tactics have worked as planned.
He refuses to acknowledge debt has to be addressed directly, that inflation is ravaging America’s landscape, that economic cycles have to be allowed to run their course and that all the government’s meddling into the economy has done is keep the recession’s normal course in a false holding pattern. This holding pattern will not allow for real growth and any increases in costs beyond inflation.
Americans are falling for the government’s “hopeful” prophecies based on corrupt math. Take out inflation’s bite and see what “1.7% growth” last year is based on. Without inflation, the numbers are down for the year, wages are still flat yet consumer borrowing (debt) is growing once again. Established banks are now infringing on the “pay-day” loan business that used to be the province of skid-row pawn shops in order to prop up their own flagging businesses. Payday loans carry an extraordinary interest rate meaning it is costing the borrower more than it is normally worth to get those loans–except the want of the borrowers has never had to be tempered in youth or middle age or senility. All the borrowers know is they want the item so they borrow to get it.
That is a trap the U.S. government is in with its entitlement programs and is a reason no progress can be made on the debt front. Most debt is an anchor on the economy and Bernanke’s printing press run, his insistence on buying more U.S. debt (monetizing) with this worthless fiat, and his ill-conceived ‘Operation Twist’ have already bartered the futures of the current crop of pre-schoolers and probably the three generations following them just for his follies.
For the government to be able to pay its debt it has to have inflation. But that will only work if the government pays down it current debt and adds no more deficits in its spending.
The progress made since the recession hit is a false spring. A major economic cold snap is still looming as long as Americans and their government continue to borrow without acknowledging the foolishness of planting a summer crop before winter has ended. What happens to those tender young shoots if nature makes up for a warm winter with its usual dose of a spring blizzard?
The blizzard may well be the oil prices. Gasoline prices are still rising. If the surge peaks at $4.25 as expected then America will be able to adapt. But that peak is expected in April, well before the normal summer drive season begins, well before the summer heat takes a toll on the electrical grid through air conditioners, well before the yearly demand peak for oil is realized.
Pimco CEO Mohamed El-Erian put some of this together in his article for Project Syndicate. He wrote: “The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery. To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011 and raised major questions about the quality of the country’s economic governance.”
The calendar, 2012, means it is an election cycle; a cycle that ramps up “political bickering” not soothes it. So El-Erian’s hope is also based on a false premise. Fiscal contraction because of inflation is inevitable.
Bundle up, America. Several bad news factors are converging on the economy and all the storm shelters have been systematically removed by your government.
“I have sworn on the altar of God eternal hostility against every form of tyranny over the mind of man.”–Thomas Jefferson