This is in response to Fed Chairman Bernanke's speech on February 3, 2011
For those who want to see the complete context for my remarks below, here is a link to Bernanke's speech -
Here are my responses to parts of Bernanke's speech -
Bernanke stated in his speech that generally, economic conditions are somewhat better in recent weeks (true), but that he still does not expect anything more than a slow recovery, with it taking years yet to get back to full employment. But he also said, "In contrast, in the housing sector, the overhang of vacant and foreclosed homes continues to weigh heavily on both home prices and residential construction." Of course, what he never says is that that is very important to the American economy because more than 60% of Americans are homeowners and that the lack of progress in the housing sector is likely to be a big problem in the future. In fact, what followed the just-quoted statement was "Overall, however, improving household and business confidence, accommodative monetary policy, and more-supportive financial conditions, including an apparent increase in the willingness of banks to make loans, seems likely to lead to a more rapid pace of economic recovery in 2011 than we saw last year." Yes, there is improving household and business confidence - I would expect that at the end of a bear market bounce. And, yes, there is certainly accommodative monetary policy - in fact, it has been accommodative in the extreme lately. And there are more supportive financial conditions - he mostly now means by that a higher stock market. And as for the apparent increase in the willingness of banks to make loans, this seems like a classic case of what I have seen a lot of lately - there is a slight uptick in an economic statistic that people want to see an increase in and they then promptly declare that the beginning of an uptrend is in place. Aside from the fact that many such beginnings of uptrends in recent years have turned out to be just minor upward corrections on the way down (no surprise to me), the uptick in bank lending so far is so small as to be a minor blip on the graph, hardly significant so far.
And then Bernanke goes on to say that the job market has improved only slowly and that the core inflation rate remains well below desired policy levels. In fact, he says (again - he has said it several times before) that "we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability." And that is, in fact, correct - according to my model, at this stage of the cycle, the unemployment rate will remain higher, and the inflation rate lower, than the Fed would want it to be. That will remain the case until the United States descends into a deflationary depression. Bernanke then talks about how the Fed used to deal with things by just lowering interest rates, but can't do that anymore because the rate has been at zero since the big downturn of 2008, so the Fed has had to use "alternative tools to provide additional monetary accommodation." That is, indeed, correct - because the initial part of the big downturn has now hit, the Fed has had to go to extreme measures in an effort to combat it. That will prove futile in the end. He then rather extensively discusses how the measures taken have helped improve both confidence and actual conditions - but I will next state why that will prove futile in the end, based on further statements in Bernanke's own speech.
Bernanke goes on to say, under the title of fiscal policy, that "The extraordinarily wide deficit largely reflects the weakness of the economy along with the actions that the Administration and the Congress took to ease the recession and steady financial markets." True. "However, even after economic and financial conditions have returned to normal [my comment - they won't], the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs." Also true (with regard to the budget) - and it is extremely unlikely that Congress will do what it needs to do to ensure that we will get back on a sustainable path (in part because that would take extreme measures at this point).
"The long-term fiscal challenges confronting the nation are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors." True.
"The CBO's [Congressional Budget office] long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits." True.
"But if government debt and deficits were actually to grow at the pace envisioned [by the CBO], the economic and financial effects would be severe." Yep, exactly - and that is, actually, what this website is ultimately all about.
"Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, causing further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult." Yep, exactly.
"By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit." Yep.
"One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point." Yep.
"The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies," Not going to happen.
" or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis." That is what is going to (actually) happen.
"Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face."
The last past of that statement is the perspective of a typical Keynesian economist - it does not take into account that a considerably more productive economy is simply not possible at this stage of the long-term cycle (a cycle which Keynesians do not want to acknowledge in the first place, which is why they have the perspective that they do, even though the reality of the consequences of the long-term cycle are staring them in the face), and so we will, indeed, be in the position where our economy will not be able to grow our way out of our fiscal imbalances at all. I predicted this a long time ago already (and this prediction is the subject of this website) - and we are almost there now (in the big picture).
The reason why we won't get back to full employment is because the housing problem is going to be a major drag on the economy long before we can ever get back to full employment - and the national debt is also going to become a MAJOR problem before we can ever get there. In fact, I expect the worst-case scenario that Bernanke talks about in his speech (as commented on by me above) - because the politicians are not going to get around to things fast enough and it is already too late in any case (we are already well into the vertical part of the debt exponential, see above).