|The Economy Is Hooked On Cheap Money
|Loose Monetary Policies Lead To Poor Decisions
Both Bernanke and Yellen failed to make any serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. What started as a program to support and prop up the economy has morphed into the main driver of economic data. Between the low-interest rates that continue to force investors into high-risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that the money will continue to be forced into the sky high equity market is flawed. What was seen as a short term and temporary measure to prop up and boost the economy has become the new normal.
|National Debt Exploded Under Obama
If all the money dumped into the economy would suddenly change direction and rush into hard assets, the shift would be devastating to our struggling economy because inflation would soar. This thought also raises other questions, what can we define as a hard asset, what is really available, and in what quantities? This may be where inflation raises its ugly head. An unknown and surprising fact about inflation is how fast it can take root. With such a shift, interest rates would move higher and investors would flee government bonds. The crash of the bond market and what many have called a Bond Bubble will become a reality. Coming up with a plausible exit strategy and making it work are two different things.
Almost a decade ago when Ben Bernanke started us down the path of quantitative easing and artificially low-interest rates a great deal was made of his having studied the great depression era. His claims he had the answers as to how we could avoid a large amount of financial pain and dodge creating a situation such as has played out in Japan and been described as the "lost decades" garnered much support. Central banks across the world have made deflation the bogeyman that allows them to rationally embraced the easy money policy and continued it even though it has not resulted in the economic growth that was promised. It should be noted that cross-border money flows and other such investment vehicles have made this all a bit dicey and forced us to ask if speculative bubbles are being created, keep in mind if you have to ask if it is a bubble it probably is.
Footnote; Allan H. Meltzer, a distinguished monetary economist and historian and a longtime professor of economics at Carnegie-Mellon Institute, died in early May at the age of 89. Meltzer was born in 1928 is viewed by many economists as America’s foremost expert in monetary policy. In recent years his mood has been troubled, he has been quoted as saying “We’re in the biggest mess we’ve been in since the 1930s,” and “We’ve never had a more problematic future.” Below is an article in tribute to Meltzer that presents some of the reasoning behind his concern over current economic policy.