Spending, problems stay high
Central banks, led by the Federal Reserve, have bought time for politicians to correct debt-financed economies.
Fearing a loss of voter support, however, leaders in the United States, United Kingdom and European Union have done little to cut profligate spending or restructure their economies.
Despite the creation of cheap, synthetic currency and fudged statistics, consumers remain cautious. Unemployment continues to threaten growth as consumers and businesses accumulate cash. Central banks have salvaged banks and stimulated securities markets to avert a capital market crash.
Even the hint of a reduction in the Fed's Quantitative Easing program (QE) sent securities into a tailspin. Clearly, there was a need for another strategy. Mark Carney, the new governor of the influential Bank of England, appears to have provided it: “Forward Guidance,” a policy of keeping interest rates low for the foreseeable future in an effort to influence the yield curve.
After years of low borrowing costs and trillions of dollars created by the Fed to buy Treasuries, the government shows no sign of restraint. Soon, Treasury debt will top $17 trillion. Added to $124 trillion of promised social benefits, mortgage debt of $13 trillion, $1 trillion of student loans and $3 trillion of local government debt, U.S. debt amounts to a staggering $158 trillion.
That is more than 10 times the gross domestic product and 1.6 times the total $99 trillion value of Americans' private assets.
This is a picture of potential national bankruptcy. It is held at bay by the creation of unlimited amounts of synthetic dollars, justified by the fact that the dollar is the international Reserve Currency.
Published minutes of the Federal Reserve Oversight Committee indicate the Fed's QE policy is causing more trouble than it is solving.
PIMCO's Mohamed El-Erian was moved to comment that: “It is also apparent that the Fed is getting more concerned about the ‘costs and risks' of its policy experimentation.”
Some members of Congress are concerned about the Fed's actions. At a hearing of the House Financial Services Committee on Wednesday, Rep. Keith Rothfus, R-Sewickley, asked Bernanke: “Where does the Fed get the money to buy [assets]? Do you create the reserves?”
“Yes,” Bernanke responded.
Rothfus asked the Fed chairman whether the Fed was printing money to buy Treasury bills. “Not literally,” Bernanke replied. (You can watch a YouTube video of the exchange here: bit.ly/14fkJnK ).
On July 1, the Bank of England named Carney to replace austerity-minded Sir Mervyn King. The selection of a foreigner — Carney is Canadian — is a first in its 309-year history.
Although Carney was a hit with the media in announcing “Forward Guidance,” central banks have proved far less able than the private sector in predicting the future.
As renowned economist John Maynard Keynes observed: Expectations of future interest rates are key to the establishment of current interest rates. In true Keynesian form, Carney hopes to join other key central bankers in manipulating markets.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at firstname.lastname@example.org.