Reckoning from Baltimore, Maryland…
“Monetary policy cannot fulfilL each and every market expectation.”
So said the head of the Bundesbank, Jens Weidmann.
Why not, investors want to know.
Mr. Weidmann was talking to The Wall Street Journal. He was explaining why Germany was sticking to its guns. They don’t use that expression in Germany. But you know what he meant.
“The crisis can be solved only by embarking on often-painful structural reforms,” he insisted. “If policy makers think they can avoid this they will try to.”
Mr. Weidmann is talking about the present. He is also describing the future. In the old world there is a backlash growing against the Germans and their financial guns. Austerity doesn’t seem to work. Countries try it. They cut spending. They fire people.
They get nothing from it. Their budgets are still far out of balance, with deficits way above the 3% limit demanded by the European Union. Unemployment goes up. GDP goes down. Unhappy mobs start breaking windows. Why bother?
Look what is happening in Britain, for example. The Telegraph reports:
The unexpected 0.2pc contraction in UK growth followed a 0.3pc fall in gross domestic product (GDP) in the fourth quarter of 2011, signaling a technical recession and Britain’s first double-dip since 1975.
Economists had expected the Office for National Statistics data to show the economy grew by 0.1pc between January and March.
The Prime Minister said the figure was “very, very disappointing” but added that that it would be “absolute folly” to change course and jeopardise Britain’s low borrowing rates. He told Parliament:
“We inherited from [Labour] a budget deficit of 11pc. That is bigger than Greece, bigger than Spain, bigger than Portugal […] The one thing we mustn’t do is abandon spending and deficit reduction plans, because the solution to a debt crisis cannot be more debt.”
Of course, you might look at these facts and conclude that they are not trying hard enough. Instead of making smallish cuts…why not make big ones? Why not actually balance government budgets so that they can tell German central bankers to drop dead?
Everyone agrees that that would be too radical. It would invite “social upheaval.” Apparently, actually living within your means is no longer politically or socially acceptable. You have to live beyond your means… The only question is ‘who will pay for it?’ The answers to that question are not easy. When debt levels were low, the answer was probably ‘future generations of taxpayers.’
At today’s debt levels it is unlikely that the debt will ever reach future generations. And with so much of the debt now being taken up by the central bank the burden shifts, from lenders to borrowers, taxpayers and consumers. Good debts may fall on debtors…even those who are not even born yet. But bad debt and inflation float down like leaves…blown by the winds…and eventually dropping down on innocent passers-by.
With perhaps the exception of the German central bank, all the others – or most of them – are trying to “fulfill each and every market expectation.” They are trying to drive asset prices higher…reach full employment…and cure diabetes.
The Fed is at the helm. And The New York Times reports that this week’s policy meeting produced an assurance. The Fed will stay on course…guided by its own star:
WASHINGTON – In a statement following a two-day meeting of its policy-making committee, the Fed said that it would continue its existing efforts to stimulate the economy, but it decided again not to expand those efforts, even though its projections show unemployment will remain a massive and persistent problem for years to come.
The statement also said that the Fed plans to maintain those existing efforts, including holding short-term interest rates near zero, “at least through late 2014.”
But a separate summary of the views of senior Fed officials showed that a majority of the committee now expects to raise interest rates by the end of 2014.
“The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the statement said. It said unemployment would “decline gradually” and that inflation remained under control despite the impact of the recent rise in oil prices, which it regards as temporary.
The Fed’s chairman, Ben S. Bernanke, strongly defended the calibration of the central bank’s policies at a press conference following the release of the statements. He said that the Fed already was engaged in a massive effort to bolster the economy.
“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate,” he said. “The view of the committee is that that would be very reckless.”
He added that the Fed’s ability to reduce the unemployment rate more quickly was somewhat “doubtful” and that any success likely would be small.
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From the Archives…
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Chinese Communism and the Human Cost of the Cultural Revolution
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Lifting the Curtain on the Chinese Communist Party
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How Empires Really Work
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