It seems the only thing the U.S. government has to show for the trillions spent on bailouts and stimulus spending is a humungous and rapidly growing national debt, now at $13.8-trillion. Economic growth is tepid, while both the mortgage default epidemic and high unemployment persist. And President Barack Obama's plans for more stimulus spending ended when Republicans regained control of the House of Representatives.
This leaves the job of resuscitating the economy to the Federal Reserve. But despite interest rates at zero, the patient is unresponsive. The only other tool available to the central bank is to buy the government's own debt through a process called quantitative easing. Last year's round of QE failed to get the pulse going, but as the saying goes, "if the only tool you have is a hammer, then everything looks like a nail." Fed chairman Ben Bernanke has decided to hammer the same nail again, buying $600-billion of new and $300-billion of maturing Treasury bills, in what is dubbed QE2. Essentially, the Fed is printing money.
Many challenge the wisdom of QE, including former Fed chairmen Alan Greenspan and Paul Volker, plus investors, business leaders and Republican politicians, who see the combination of printing money and runaway deficit spending as a time bomb.
As they showed at the recent Group of 20 meeting in South Korea, world leaders view QE2 as another salvo in the currency wars where "winning" means driving down the value of your own currency, leaving the high-value currencies "losers" at a trade disadvantage, Canada being one of them. On the currency battlefield, the world's two largest economies are locked in a battle for the bottom. The U.S. arsenal employs deficit spending and QE-style money printing, while China uses the socialist command approach of controlling its foreign exchange rate. Each accuses the other of starting the war.
Trade issues aren't the only things fuelling international opposition to the U.S. moves. Flooding the financial sector with cash gives U.S. companies and money managers the opportunity to redeploy this gift from the American taxpayer to higher-return investments in other countries (thus driving up the value of foreign currencies while "exporting" inflation).
But isn't QE supposed to foster increased investment within the United States? And if a lot of that cash goes overseas, won't that worsen the U.S. longer-term financial picture? On the other hand, since when do countries complain about foreign investment? Doesn't it create jobs? Could it be that what we always thought were good things are actually bad?
Has the world been turned on its head? Just consider:
The only thing staving off a total economic collapse in the U.S. (which entered this century as the impregnable global leader) is its continued ability to sell more than $100-billion worth of new Treasury bills every month, supported to a large degree by Asian and Middle Eastern governments.
The U.S. Treasury and central bank are focused on creating inflation by pouring out unprecedented amounts of "liquidity." Where does all this liquidity go once recovery takes hold? Haven't runaway deficits and money printing always sown the seeds of devastating inflation? Because near-zero interest rate policies result in paltry returns for those who have worked hard to build a nest egg, American savers lose on both fronts. They're getting almost no return on their money now, and face the prospect of inflation ravaging their future savings.
China's savers face a similar fate for different reasons. Beijing's near-zero interest rate policy shifts interest-free money from the accounts of small savers to the wealthy, who reinvest it in an already hot economy, driving house prices beyond the reach of most citizens. Who would have thought we'd see policies that make the rich richer and the poor poorer in communist China?
What tangled webs governments are weaving in the name of ending the Great Recession. Makes you wonder what would have happened if they had simply spent prudently, set sensible rules, and let the private sector drive the recovery. But that's oh-so yesterday.