Wednesday, February 09, 2011

Bernanke Scolds Congress

Federal Reserve Chairman Dr Ben Bernanke had this to say in his prepared remarks before Congress today:
The CBO's long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits. But if government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on US output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.
I guess this means that Dr Bernanke would prefer not to print money, which will be the more likely outcome if fiscal policy continues on its current course. I read Dr Bernanke's comments above as an inflation warning...


Source: Indiviglio, D (2011, February 9), Bernanke Scolds Congress on Deficits, But Provides Little Guidance, Atlantic.

2 comments:

Mike Durante said...

You are a moron sir. The Federal Reserve's current monetary policy initiatives are necessary to prevent the economy from going back into recession directly because of the runaway fiscal policy deficit the Congress and the President have wrung-up (the deficit has caused economic uncertainty and paralyzed the recovery). The Fed's balance sheet, while at an uncomfortable (to the Fed) $2+ trillion, also is primarily made-up of long-term assets and offsetting liabilities stemming from the financial crisis (Fed had to unwind Bear Stearns and Lehman e.g.) and excess member bank reserves (banks are hoarding cash in the reserve accounts at the Fed, which is the opposite of printing money). Neither is "printing money" as these offsetting assets and liabilities actually reduce monies in circulation, especially the excess member bank reserves that stand around $1 trillion. And QE2 is designed to replace existing Treasury debt held in the private sector with cash in hopes somebody will lend it to somebody other than the US Treasury (battling the “fear trade” causing a lack of private sector lending to the private sector). That's not "printing money" either. That’s called traditional monetary policy only this Fed and this Chairman prevented a Depression having learned NOT to snuff-out liquidity like a compromised FDR controlled Fed did in the 1930’s.

Where did you study monetary economics? Thought so!

Dr William J McKibbin said...

Hi Mike, thanks for your thoughts. I agree that the monetary position of the US is dire. Likewise, the fiscal policy situation in the US is equally dire. As for the future, I remain fearful of monetary challenges in the near term...

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