John Mauldin (see writeup here) recently explained how difficult such forecasts are because of a complex chain of interdependent variables.
Politicians know only one way — stimulate. Because the world is overly concerned about U.S. deficits, surreptitious QE will be tried first (it is likely that it has already begun). As the economy continues to sink, QE will become an overt policy.
Unfortunately large monetary easing will not produce a recovery. Another fiscal stimulus package (probably before the election so as to “buy” votes) will be implemented. Other than the possible vote-buying aspects, it will also fail.
We have gone well past the point where the government can effectively stimulate the economy via either fiscal or monetary policy. The economy is overdosed on both forms of medication. More will likely kill it or change its character in such a manner that no one will be happy.
The economic depression will worsen as the old medicine becomes more toxic. A recovery requires radical action (and inaction). Programs, agencies and departments must be slashed, burned and eliminated. Does the Energy Department produce one barrel of energy? Does the Department of Education educate one student or improve Education? These are only two of the thousands of Departments and Agencies that need to completely disappear. They are useful only for the government bureaucracy that resides within (work is too demanding a term).
Inaction with respect to monetary and fiscal stimulus is required. Improper resource allocation must be addressed by markets, a function they perform naturally and effortlessly. Governments can neither identify nor correct improper relative prices or malinvestment. Mis-allocated assets such as personnel, buildings and machinery must be freed up so that they can be deployed to where they can once again be productive. Government cannot help or direct this process. They can only hinder it.
Massive cuts in government programs are necessary to free up resources for the private sector. Taxes must be cut. Obamacare must be repealed. Financial Regulation must be redone. Cap and Trade must be forgotten. If those things begin around the end of this calendar year, I would believe that someone has gotten serious. I don’t expect to see it and even if I do, I don’t expect it to continue or produce the size cuts necessary.
The damage done by government is not measured by deficits, although they won’t be appreciated by our children and grandchildren. The damage is in terms of the resources commanded, that is government spending. Raising taxes to cut the deficits does not solve the problem.
Whatever resources the government uses, it takes from the private sector (via, borrowing or printing money or higher taxes). The government produces virtually nothing and even does that much less efficiently than the private sector. Every resource used by government is unavailable to the private sector. Production, standard of living, real wages must all drop when capital available declines.
Jim Grant offers similar thoughts below.
Jim Grant Is Confident QE 2.0 Is Just Around The Corner
Submitted by Tyler Durden on 07/14/2010 15:24 -0500
Jim Grant, one of the most respected voices in the financial industry, joins Zero Hedge and others, who see that the only choice the Federal Reserve has now that the temporary and shallow reprieve from the clutches of the deflationary depression is over, is to print more money in the form of another iteration of QE. Whether this will be another $2.5 trillion, like last time, which was the price of an 18 month delay of the inevitable, or a $5 trillion concerted global effort, as Ambrose Evans-Pritchard believes, is irrelevant: the only option the central printers, pardon, bankers, have left is to flood the market with yet more worthless paper (keep an eye out on the doubling in the price of gold the second QE2 is publicly announced, which will also double as the obituary for all fiat paper). In an interview with Bloomberg TV, Grant says that the first order of business tomorrow when the Fed’s new additions officially join their new groupthink perpetuating employer will be “to try once more to print enough dollars to make something happen in the U.S. economy.” The ever-sarcastic Grant manages to completely skewer Janet Yellen, Steve Diamond and Sarah Bloom Raskin, to ridicule the Fed’s 100% track record of not only focusing on the wrong thing time after time, but getting the response consistently wrong with 100% precision, and also manages to makes fun of the Fed’s credentialed WSJ lackeys, who courtesy of the Fed’s “editorial” control over the reporting process, get a direct line into leakable Fed strategy.
Grant’s thoughts on new Fed additions:
“I think the first order of business will be to try once more to print enough dollars to make something happen in the U.S. economy.”
On San Francisco Fed President Janet Yellen:
“Janet Yellen has had 36 opportunities to vote on monetary policy at the Federal Open Market Committee and she has voted ‘Aye, yes’ 36 times. 36 for 36 times. Now, has the Fed been right 36 consecutive times? No. I think that Janet Yellen is a well credentialed, consensus-hugging economist straight out of the Fed HR department. She is ideal from the point of view of the Fed bureaucracy. She will make not one ripple.”
On MIT economist Steve Diamond and Maryland state banking regulator Sarah Bloom Raskin:
“I’ve never met them but I suppose they are charming. They certainly are well credentialed. They may well have an avocation in monetary theory, but that is not their vocation. Their vocation, in the case of Professor Diamond, is fiscal policy, pensions, social security, he is an authority. He’s mentor of Ben Bernanke so he’s a formidable academic.”
“Sarah Bloom Raskin is a formidable regulator. But neither is a formidable thinker about the nature of money or about the history of money or about how the Fed might paradoxically make things worse by doing what it does trying to make things better, which I think is the great question. These are people who, I think, are unlikely to oppose novel solutions to our fundamental monetary dilemma which is that the U.S. dollar is a faith-based currency of no intrinsic value that is manipulated by the Fed and the consequences of the manipulation are often quite different from what was intended. That’s the problem.”
On Fed monetary policy:
“Deflation is a funny thing. It’s a word that is much in the news, much in the markets, but is all too infrequently to find. So the Fed says that deflation is broadly declining prices. But could not also be progress? In other words, if the world produces more at lower prices, is that so bad? Americans spend half of their weekends, it seems, looking for bargains.”
“So the Fed is telling us that bargains galore is something that the Fed must resist with radical volumes of credit creation… I guess what I would ask the Fed is would it please stop and help us understand why this is bad? So in 2002 and 2003, Alan Greenspan, then chairman, and Ben Bernanke, then a newly fledged governor, were out giving speeches saying that deflation is a clear and present danger, and we must – they said at the Fed – must cut rates dramatically, which they did to 1 percent.”
“But the price indices today are much weaker than they were in 2003. So where is the Fed? Why not broach the topic of deflation again?”
“So what I blame the Fed for, among other things, is a lack of intellectual rigor and forthrightness.”
On Federal Reserve Chairman Ben Bernanke:
“I think this is not being forthcoming with us, the people, about the nature of his concerns.”
“In 2003, he was all deflation all the time. Well now the Cleveland Fed’s median CPI was like 1.7 percent year-over-year, now it’s 0.5 percent year-over-year. So where is the concern?”
“I think the concern will surface. We’ll see more on Friday when the CPI comes out. But I think something ahead of the markets is a likelihood of the Fed stepping on the gas once more, so called quantitative easing - I think that’s likely to happen…The Fed is already clearing its throat. You can see this in the newspaper leaks.”