We had no sooner finished our last post – on how last week’s US Congressional elections will make little difference to America’s underperforming economy – than our view was confirmed by the most authoritative source.
The US Federal Reserve has agreed to buy more federal government bonds – in effect allowing the government to print more money.
This decision has been strongly condemned by other countries. America, unable to deal with her own problems, is flooding the world markets with more cheap money. It is a selfish act.
Yet it may also be a necessary act. The real antidote to the lethargy of the US recovery would be for the federal government to take decisive political action to unleash the enormous latent power of American free enterprise – cutting taxes and regulation. However, the probability is that deadlock between the Democratic President and the Republican House of Representatives will prevent any such action.
That leaves the Federal Reserve as the only authority with the power to do anything, at least for the next two years.
So Federal Reserve Chairman Ben Bernanke is right to step in and try to fill the leadership vacuum. There is simply no one else who can do anything. Whether his first decision as the new undisputed Commander-in-Chief of the US economy is a wise one is, to put it politely, far more questionable.
Printing more money is a short-term solution that does nothing to address America’s longer term loss of competitiveness. Indeed, the superficial prosperity it is intended to produce might itself be dangerous, as it covers up America’s underlying problems and generates a false sense of security.
The greatest danger of all is that other countries will follow America’s example. After all, what is the point of virtuously balancing one’s own budget when someone else is benefitting from cheap money?