NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

Put that Helicopter in Reverse, Mr. Chairman


I suspect that, given a fighting chance and full political immunity, the Obama-Reid-Pelosi (ORP) machine would like to try some more fiscal stimulus. ORP rarely encounters a spending measure it does not like (except for a few military ones, from time to time). But the Elected Powers that Be are terrified, at the moment, of touching anything that smells like Stimulus VI. So they are making a hand-off to the Unelected Powers that Be, who are more than willing to run with that ball. Helicopter Ben laid it out this morning:

Treasurys are mixed after Federal Reserve Chairman Ben Bernanke said the central bank was ready to buy bonds to boost the economy.

In a speech Friday morning, Bernanke said the Fed has yet to figure out how the bond purchases would be paced. The effort would be aimed at lowering interest rates to stimulate spending and prevent prices from falling.

Exactly how much more of this does Chairman Ben intend to try? We’ve already had a 13-figure spending campaign for stimulus, and umpteen  rounds of “quantitative easing,” i.e. slowly debasing our money in the hopes that people will want to be quickly rid of their devalued dollars, thereby stimulating economic activity. (When you put it like that . . . ) To what end? Growth and jobs are a joke, and low interest rates have only encouraged government to borrow and spend even more recklessly than it usually does, sinking money into projects of negligible real economic value. We just basically set a $1 trillion pile of money on fire and roasted marshmallows over the flames. That is why Nancy Pelosi is about to become the first female ex-speaker of the House.

Bernanke is a scholar of the Great Depression, and he sees that inflation is currently at about  0.8 percent, which is basically nothing in the Fed’s view, and he fears the deflationary spiral above all things. That fear may be overblown, or at least in need of qualification. Deflation is a real risk, to be sure, but so is unexpected inflation. In fact, we’ve already had inflation, properly understood: Inflation is not a general rise in prices; inflation is an increase in the money supply (an inflation of the money supply) which often makes itself felt through higher general prices — but not always. Asset bubbles (dot-bomb, housing, etc.) are a particularly noxious expression of inflation. Since we are teetering on the precipice of Mortgage Meltdown 2.0, as $1 trillion or so in mortgage-backed securities are at risk of unraveling or experiencing radical revaluations, lots of money is looking for snug harbor. Meaning Treasuries.

The flight to U.S. government debt has enabled Washington to borrow tons of money (literally, tons: Put the Obama deficits in hundred-dollar bills stacked on pallets, and you’re talking tons and tons and tons of money) on easy terms at low, low interest rates. Big debt, easy terms, low rates, for now –  sound familiar? Welcome to subprime government. And just as the housing market came crashing down when interest rates inched up and all those variable-rate mortgages began to reset, the fact is that the world is not going to be in a financial crisis forever, and U.S. government debt is not always going to enjoy the implicit subsidy that comes from being the world’s safe haven in troubled financial times. When your balance sheet starts to look more Greek than Japanese, the market is going to start demanding Greek rates (about 10 percent, at the moment) to finance your fiscal shenanigans. And that is what Fiscal Armageddon means: The bills are due, the cupboard is bare, and all the money in the world won’t save you, even if you could borrow it, which you can’t.

So here’s a contrarian take: The Fed should stop trying to drive down interest rates. It should instead work to raise them. Why? Our economy needs savings and investment — but why save when interest rates are effectively zero? And where can funds for investment be had if not from savings? Answer: from borrowing — and more debt the last thing American businesses, American households, or American government needs right now. Interest rates are going to go up eventually, anyway, so we may as well get started now in order to avoid an especially disruptive transition when the time comes. Higher interest rates would encourage savings, encourage investment, discourage wanton borrowing, and help rebuild  the value of the dollar. Sure, we’d lose the value of the allegedly stimulative effects of zero interest rates — and a lot of good they’ve been doing us so far: 10 percent unemployment, growth that is as dynamic as molasses in February.

The United States should start acting like a dollar is worth something if it expects a dollar to be worth something. Otherwise, to borrow from a wise man, we are left with Barack Obama as the devalued head of a devalued government.

Tags: Debt , Deficits , Deflation , Despair , Fiscal Armageddon , General Shenanigans , Inflation , Stimulus


(Simply insert your e-mail and hit “Sign Up.”)

Subscribe to National Review