Policy Imbalances

David Brooks in “When Reality Bites” discusses the reality that exists when the policies of one administration cannot be ignored by the administration that succeeds it. You can find this article at (http://www.nytimes.com/2008/02/12/opinion/12brooks.html?hp). In this article Brooks discusses the war in Iraq and the agenda for domestic spending.

I would like to include a third area that I believe is as important or even more important than the other two. I quote from my comments on the political situation (http://masepoliticalcommentary.blogspot.com):

“There are times when the imbalances (in policy) leave an irreconcilable dilemma as is the current situation with respect to economic policy. At present it appears as if the American economy is going into a recession. To lessen the severity of recession the government can execute a combination of monetary and fiscal actions. In early 2008 we see the Federal Reserve lowering the target interest rate it uses to conduct monetary policy and the Bush Administration and Congress creating a fiscal stimulus package. The Federal Reserve has had to lower its interest rate target because of dislocations in the financial markets. The fiscal stimulus package resulted from the game playing of the President and Congress, both of whom could not do ‘nothing’ in fear of facing massive criticism in upcoming elections. The dilemma is that these policies are exactly the opposite needed in order to stop the decline in the value of the dollar which has been declining for over five years. The decline in the value of the dollar can be attributed to the deficits created by the tax cuts enacted early-on by the Bush Administration and low interest rate policy followed for two years by the Greenspan led Federal Reserve.”

Whoever is elected this year is going to have to face this dilemma…fight the recession and let the dollar continue to decline in value…or risk a longer or deeper recession and work to stop the depreciation of the dollar. If we continue to let the dollar slide…American assets get even cheaper to foreign wealth.