It's easy to claim that Social Security is driving the deficit, or that the U.S. will imminently become insolvent "like Greece" (it can't, for the simple reason that it has its own currency, while Greece's debts are in Euros) when the public's baseline knowledge level is zero. Almost nobody really understands high-level economics, but people have very concrete ideas about whom they don't want to spend taxpayer money on, and in this debate, that's usually enough. Politicians are so dense about this, they often argue both sides of the issue simultaneously without realizing it. "We have spent more than what we have brought into this government for 55 of the last 60 years," Pope Boehner said recently. "There's no business in America that could survive like this. No household in America that could do this."
Right. No household in America could, but America could – and did – ride deficits for decades into the world's biggest economy. Whether or not the U.S. deficits are too big is another question, but that they can go on more or less infinitely as long as the economy grows – or for at least 60 years – is something Boehner himself seems to be admitting, despite himself.
Even the economists who pretend to know where all this is going are only guessing. "As a general rule," quipped economist Dean Baker after the Reinhart-Rogoff fiasco, "economists are not very good at economics."
This is especially concerning, given that we're all entering uncharted waters, now that:
THE FED ANNOUNCES: MORE COWBELL
As is pretty much always the case with modern American politics, people seem to find hobgoblins and conspiracies everywhere in every place except where the real thing, or something close to it, actually exists. In the case of the debt issue, we have a raging national controversy over something as meaningless and routine as raising the debt ceiling, while a genuinely radical experiment in something vaguely like centrally planned economics is going on at the Fed and the other central banks around the world, and the public has mostly yawned in response.
Since the beginning of the crisis in 2008, the Federal Reserve, under chairman Ben Bernanke, has attacked our stagnating economy with an array of tools never before used by our central bank. Backing up for a moment, since 1977 – when Congress amended the Federal Reserve Act – the Fed's official mandate has been to promote maximum employment and low inflation. The Fed's traditional method of addressing these matters has been to increase or decrease the money supply by raising or lowering interest rates, i.e., by making money cheaper or more expensive to borrow. In other words, when the economy is stalled, the Fed cuts rates and waits for that to result in more lending and more employment. When the economy is growing too quickly, which can lead to inflation, the Fed backtracks to slow things down.
But in 2008, when the economy was not merely feeling a little unwell but was actually flatlined on the ER table, slashing interest rates all the way to zero wasn't enough to stimulate lending and investment. So Bernanke took a step further and started to inject new money into the financial bloodstream directly, willing trillions of dollars into existence and using that newly created money to buy things like mortgage-backed securities and treasuries. This vast central bank money-printing/stimulus program, which ought to have frightened conservatives every bit as much as the $800 billion stimulus Obama took out of the Treasury in 2009, was successfully camouflaged by its dull-sounding moniker, Quantitative Easing, a term that, in one of the genuine curiosities of recent financial history, has no known origin.
In any case, the original QE program, which began in November 2008, was supposed to last only a year and a half and add about $1.75 trillion to the economy. Almost two years later, with unemployment still hovering near 10 percent, Bernanke tried again with another $600 billion. QE2, as it was dubbed, didn't work either. So last year, the Fed announced a different tactic: It would simply pump $40 billion a month into the economy on an open-ended basis, including mass purchases of mortgage-backed securities, which would have the effect of artificially lowering mortgage rates and propping up the housing market.
That was dubbed QE3, and it lasted for a few months, until December of last year, when the Fed decided it had to be even more aggressive and more than doubled the size of the program to $85 billion a month. Wall Street refers to the open-ended program by the affectionate nickname QE-infinity.
And just a few weeks ago, when some thought Bernanke might signal an exit strategy for the program, the Fed cryptically announced that it "is prepared to increase or reduce the pace of its purchases," which made it clear that there was no immediate end of the program in sight and that the Fed's already outrageous bulge may grow even bigger before all is said and done.
Meanwhile, the Bank of Japan in April announced its own massive QE plan, which could reach $1.4 trillion by the end of next year. Japanese officials say they want to essentially double the Japanese money supply. The Bank of England also has been steadily increasing its own QE program for years; it sits at $581 billion now, but may increase again in July, when former Goldman Sachs banker Mark Carney arrives to head the Bank of England. And European Central Bank president Mario Draghi (another Goldmanite, by the way), who created a one-trillion-Euro-size QE-style program called Long Term Refinancing Operations (LTROs) in late 2011 and early 2012, has recently signaled that his bank was "ready to act" if it looked like a QE-ish program was needed to intervene to save the cratering European economy.
Essentially, all of these central banks are creating vast sums of money and thrusting themselves into the world economy as gigantic buyers of stuff, be they mortgages or treasury bonds. In theory, the banks will eventually "sterilize" or reverse the process by selling off all this stuff they've bought and draining the economy of its "excess liquidity," but no one knows when that will be, and for the time being, QE is pure financial steroids. It's stimulus on a much bigger scale than Obama's recovery program, it's open-ended, and it's not voted upon. In fact, apart from the fact that the Fed chairman is nominated by the president, the actions of the central bank are not merely undemocratic but intensely secret, with minutes of its Federal Open Markets Committee (which debates decisions like the raising of interest rates or QE) only released three weeks after decisions are made. The Fed therefore never has to engage the public in real time about its decisions. Instead, it hands down edicts, and Wall Street watches for clues into its mysterious behind-closed-doors deliberations the way Catholics watch the Apostolic Palace for smoke before papal elections.
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