Battle4Liberty

Managing an economy effectively is an impossible task. This is precisely why Congress and the Fed should quit trying.

The recovery Vice President Biden has been referencing since summer ’09 just hasn’t materialized. There have been a few positive signs, but the pace of the recovery—if we’re really in one—has lagged far behind that of most recession recoveries. The best excuse the Democrats can muster is that Bush created more or a mess than was previously known and that things would have been worse today if aggressive action had been taken. They don’t mention the failed massive spending programs and entitlements promoted by Obama and the Democrat Congress.

They certainly don’t mention the Fed either. The Federal Reserve has been pumping money into the economy at a record pace over the past two years. From near zero interest rates to quantitative easing, the Fed has done everything is can to prop up the economy. It’s not working.

The details can be overwhelming, but the basics of the situation are clear. Congress and the Fed have been throwing so much money at the problem that we’re beginning to pay the price: 

1. The current “official” unemployment rate is around 9% and the anticipated budget deficit this year is in the $1.7 trillion range.
2. S&P is warning about a possible reduction in our credit rating. A reduction would substantially increase our borrowing costs.
3. China is shifting its investments in foreign currency away from the US dollar and is taking steps to promote the RMB (yuan) as a major global currency. The US has enjoyed significant economic advantages because of the US dollar’s supremacy in world markets. This could be coming to an end soon.
4. The value of the dollar is declining and inflation is on the horizon.

 Ironically, the Keynesians running our government treat these developments as surprises, but none of them were difficult to predict. Read Mises, Hayek, Hazlitt, and even Ayn Rand and you would have seen them coming. So where do we go from here?

With the President and the Dems in Congress lambasting the modest Ryan proposal as extreme, it’s going to be difficult to achieve meaningful budget reform. But the Fed faces a more serious challenge. Insiders expect the Fed to back off its ill-fated purchase of $600 billion in US t-bills to ease inflationary pressure. However, draining the credit already pumped into the economy will curb economic activity over the short term. Moreover, when the Fed stops buying t-bills, interest rates will likely rise. Higher inflation and interest rates will make real long term growth difficult. We could be seeing Jimmy Carter all over again.

Even Keynesian economists recognize that there’s no such thing as a free lunch. We’re paying dearly for yesterday’s lunch now. Unfortunately, neither Congress nor the Fed are willing to get out of the way and let the economy grow on its own. Don’t expect any real change until that happens.