Confidence, not cash, is what people really need
By John Browne
Published: Saturday, Aug. 25, 2012, 9:09 p.m.
Congressional committee examinations continue to look to the Federal Reserve to trigger economic growth.
The Fed's plan calls for the injection of more economic stimulus to get consumers purchasing and corporations producing.
Some members of Congress sound desperate in their pleas. In fact, trillions of dollars of available cash already exist. But some $4 trillion of it is sitting in bank deposits producing negative yields.
What is needed is not more cash, but more consumer confidence. That is the job of government — not the central bankers.
World Bank statistics show a clear but erratic decline in U.S economic growth, as measured by GDP, or gross domestic product — the measure of all goods and services produced.
Two years ago — in the second quarter of 2010 — GDP grew at a rate of 3.9 percent. Recent figures show the growth rate for the same quarter this year at 1.6 percent.
The World Bank's figures show that declining economic growth is a global trend. China has experienced a decline from 14.2 percent in 2008 to 9.1 percent in 2011.
Japan economic output has shrunk from 2.2 percent to a negative 0.7 percent over the same period.
Within the European Union — now the world's largest economy — Greece's growth has declined from 3 percent to a negative 7 percent, and Spain's has fallen from 3.5 percent to 0.7 percent. Even Germany, the EU's powerhouse and the world's second largest exporter, has seen its growth rate drop from 3.3 to below 3 percent.
The EU, with China as its largest customer, is heading for a depression. The global economy looks vulnerable.
This economic contraction has taken place in the face of the largest injection of cash in history. The world is awash in cash.
Consumers, corporations, and even banks are hoarding more than $5 trillion in cash, excluding Treasuries, rather than spending.
Even the Fed appears to recognize that something other than cash is missing. While pessimistic about the economic outlook, Fed Chairman Ben Bernanke has resisted more stimulus in the form of quantitative easing — the practice of buying up bonds and injecting cash into the economy.
Rather, on numerous occasions, Bernanke has placed the onus on Congress to cut government waste, to establish budgets and restore the vital element of economic certainty.
Over the past four years, the Senate — controlled by the Democrats — has failed to produce a budget. Meanwhile, U.S. Treasury debt now exceeds GDP, joining Portugal, Iceland, Ireland, Greece and Japan. The seriousness of this prompted noted economist Mark Zandi of Moody's to call for focus on “the grave need to address our long-term fiscal problems.”
Furthermore, Congress' inaction has created an atmosphere of great uncertainty over taxation, regulation and health costs. This, in turn, has created fear and a lack of confidence. The proof is the hoarding of cash by consumers and corporations. The result has been a net loss of 5 million jobs since 2008.
If the U.S. and global economies are to avoid a deep recession or even depression, confidence must be restored to create real jobs and true consumer demand. To achieve this, Congress must act urgently and responsibly to encourage confidence rather than rely on being bailed out.
John Browne, a financial analyst and former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media.
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