What Economic Growth in the United States? And, in Europe?

The Congressional Budget Office (CBO) just released its forecast for economic growth and what it sees seems to differ substantially from what the Federal Reserve sees.

The CBO forecast places economic growth (real GDP growth) for the United States at 2.0 percent this year and at 1.1 percent in 2013. (http://www.nytimes.com/2012/02/01/us/politics/deficit-tops-1-trillion-but-is-falling.html?_r=1&ref=todayspaper)

The Federal Reserve just released its projections last week.  Taking the average of the ranges given, the Fed is forecasting that economic growth in 2012 will be 2.5 percent, and, for 2013 will be 3.0 percent.

Hey, these forecasts are going in opposite directions!

The one forecast, that of the CBO, emphasizes the future of the federal deficit: “The deficit will be $1.1 trillion in the current fiscal year, about $200 billion less than in 2011, and will fall sharply in the next three years as a result of tax increases and spending cuts required by existing law…”

The other forecast, that of the Federal Reserve, emphasizes the future of interest rates: short-term interest rates will remain close to zero until well into 2014.

In one sense, it seems as if the consequences of the two forecast are backward.  In order for the deficit to decline, the economy needs to be growing so that tax revenues will increase and welfare payments will decrease.  This will not happen if economic growth slows and unemployment increases…as it does in the CBO projection. (See a strong argument on this point, http://professional.wsj.com/article/SB10001424052970204740904577195352148844134.html?mod=WSJ_Opinion_LEADTop&mg=reno-secaucus-wsj.)

The Federal Reserve, on the other hand, has short-term interest rates staying extremely low despite the fact that they predict rising rates of economic growth, a condition that usually produces higher levels of interest rates.  This is because the demand for money generally increases with the rising level of incomes produced by the economic growth.

The major point is, however, that the CBO has produced a pretty dismal economic forecast. 

The CBO projection has unemployment rates rising to 8.9 percent in the last quarter of this year, up from 8.5 percent in December 2011.   Furthermore, the unemployment rate is expected to rise to 9.2 percent in the final quarter of 2013. 

This is not good!

And, what happens to the amount of under-employment if the CBO forecast takes place.  We certainly would see the under-employment rate stay in the 20 to 25 percent range.

On top of this is the real threat of recession in Europe.  The question is, how much does a European recession play into the forecasts of the Congressional Budget Office?

My big fear has been that a recession in Europe will have very negative connotations for growth in the United States.  (See my post, “Issue Number 1 for 2012: Recession in Europe,” http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe.)

Data released yesterday and presented by the Financial Times indicates that the unemployment rate for the eurozone was at 10.4 percent at the end of 2011 for the whole workforce, and was at 21.3 percent for the category “youth.”  Furthermore, the consensus real GDP growth for the eurozone is at negative 0.3 percent, not a level that is conducive to the reduction in the unemployment rate. 

The unemployment rate ranges from 22.9 percent in Spain and 19.2 percent in Greece to 5.5 percent in Germany and 4.1 percent in Austria showing the split that exists within the eurozone, itself. (See ”Eurozone Jobless Rate at Euro-era High,” http://www.ft.com/intl/cms/s/0/dca5fe48-4bf3-11e1-98dd-00144feabdc0.html#axzz1l92ForcZ, and, “Contraction Threat Clouds Euro Zone,” http://professional.wsj.com/article/SB10001424052970204740904577194442237686180.html?mod=ITP_pageone_3&mg=reno-secaucus-wsj.)

How much impact will this “European Recession” have on the economy of the United States and has it really been taken into account by the forecasters of the CBO and the Federal Reserve System?

And, given the over-extended position of consumers (http://seekingalpha.com/article/328252-where-is-the-u-s-consumer), corporations (http://seekingalpha.com/article/326412-corporate-confidence-continues-to-wane) , and banks (http://seekingalpha.com/article/320698-what-s-to-like-about-the-united-states-banking-system), where might a pickup in spending take place?

Given these facts, I tend to agree more with the economic projections of the Congressional Budget Office than I do with those of the Federal Reserve.  However, if we do achieve the growth rates of the Congressional Budget Office it would seem that the cumulative federal deficit for the next five years would be closer to the cumulative federal budget deficit of the past five years…in excess of $6 trillion, than what is now being forecast.

In essence…we are going nowhere…fast!

The Obama Debt Machine

My estimate for the cumulative deficit over the next 10 years before the Obama budget was announced this week: in excess of $15 trillion.

My estimate for the cumulative deficit over the next 10 years after the Obama budget was announced this week: in excess of $15 trillion.

I see no leadership coming from this administration (or the Congress) to achieve anything different in the future. There is no evidence of the will to take leadership on the United States economic ship.

We have arrived at this position through the actions of both Republicans and Democrats. There is no evidence that this condition will change in the near future.

Everything is the same, with one exception: we are heading full steam into the 2012 presidential election.

Our history: We have had 50 years of credit inflation that has brought us to this position.

Forecast: credit inflation will continue for the foreseeable future.

Ben and Tim: Part I

We have been living with the team of Ben Bernanke and Tim Geithner since 2006, Bernanke as Chairman of the Board of Governors of the Federal Reserve System and Geithner as the President of the Federal Reserve Bank of New York. The only person now missing from this team is Hank Paulson, who was Secretary of the Treasury until Geithner moved into that position.

During their partnership, there has been a failure to recognize the clouds that were forming in the 2006-2007 period. We have the flooding of the banking system which took place beginning in the fall of 2008. And, now, we have the sinking of the United States dollar.

It was very disingenuous of Treasury Secretary Geithner to claim yesterday that he…and the United States government stood for a “strong dollar” and “will not engage” in currency devaluation.

This stance has been taken by the United States government and every Treasury Secretary since the dollar was floated in August 1971.

Yet, the value of the dollar has fallen by around 30% on a trade-weighted basis against major trading countries since this index began in early 1973. The value of the dollar on the same basis has fallen by about 11% since March 2009.

And, where do we stand policy wise? The deficit of the United States government has fallen to $1.3 trillion in fiscal year 2010, down from $1.4 trillion in fiscal year 2009. My estimate of the cumulative fiscal deficit for the next ten years, assuming the current philosophy of government (which is the same philosophy of government that has been around since the early 1960s), is at least $15 trillion.

Monetary policy? Well, the Ben and Tim team gave us a Federal Reserve balance sheet that more than doubled to over $2 trillion from about $0.9 trillion in August 2008. Now, Chairman Ben is making noises that could lead to an increase in this balance sheet to over $3 trillion in the next year. And, with federal deficits over the next ten years that could total $15 trillion or more, it is hard to see how this balance sheet could decline by much.

The basic crisis philosophy of the Treasury and the Federal Reserve since the fall of 2008 has been to throw as much “spaghetti” as they can against the wall to see what sticks. That policy still seems to be alive and well within the halls of the Federal Reserve and the Treasury.

This approach to policy making is what international investors are concerned about at the present time.

A complicating fact relating to this picture is that the world is splitting into two camps. There is the dollar/Euro camp that is composed of the developed countries in the world who are still battling to get their economies moving again. (Note that the dollar/Euro camp is split as well. See “Fed’s Strategy Will Bring Euro Victory Over the Dollar,” http://www.ft.com/cms/s/0/239b1134-db85-11df-ae99-00144feabdc0.html.)

And, there is the camp that includes the rapidly emerging nations (including some others) that are experiencing relatively high rates of economic growth.

This bifurcation into the two camps is causing and will continue to cause world trade and finance pressures going forward. There may not be any change for some time about the place of the United States dollar as the world’s reserve currency. But, if the scenario presented above actually occurs, the pressure on the dollar will just continue to grow with time.

At this point I won’t get further into this discussion for the focus today is on Ben and Tim.

Why is it that I have so little confidence in the future of the economic policy of the United States government at the present time. Bernanke has been in a leadership role around Washington since 2002. Everything he has been connected with has not turned out particularly well with the exception of his ability to throw “spaghetti” against the wall. Geithner is the only senior economic advisor of the Obama administration that was with the administration at the beginning and still remains. What interpretation can be put on this survival?

Who knows, maybe Ben and Tim will go down in history as the team that saved the economy but sank the dollar.

I don’t know when in my professional career that I have been so nervous about the economic leadership in this country. My impression is that many others feel the same way I do and much of this feeling is getting reflected in the value of the United States dollar. Thus, although the value of the United States dollar will vary from time-to-time, I see no reason to believe that this value will not continue to trend downwards over the longer term.

Looking at the Dollar Again

As European financial markets seem to be stabilizing, it is time to look again at the value of the dollar. After the heat over the sovereign debt crisis cooled somewhat the value of the dollar, once more, headed south. Over the past two years or so, global markets have seemed to be saying, if the financial world is going to fall apart today, I want to be holding some kind of dollar assets. However, if I am to bet on the value of the dollar over an extended period of time, then I want to hold assets denominated in other currencies.

As one can see from this chart showing a trade-weighted index of the United States dollar against the major currencies of the world, the general drift of the value of the dollar since the early 1970s has been downward. There are two major upswings. The first relates to the tightening of credit by the Federal Reserve under the leadership of Paul Volcker. This is the upswing that goes from about 1980 to 1986. The second upswing came during the federal budget tightening led by Treasury Secretary Robert Rubin which eventually resulted in a budget surplus and lasted from about 1995 into 2001.

During the last two years or so, there have been two minor upward movements in the value of the dollar. These minor swings came during the fall of 2008 into 2009 and in the spring of 2010 connected with the sovereign debt crisis in Europe. This last upswing seems to have peaked as the dollar, once again, heads downward.

Although the rise in the value of the dollar during the first of these movements was “across the board”, the primary reason for the rise in the value of the dollar in the latter period was the movement of money out of the euro. But, given the actions of the European Union and given the results of the “stress tests” applied to European banks, confidence seems to be returning to the Euro.

So, the long-run trend in the value of the dollar still seems to be downwards.

To me, the price of a nation’s currency is still the most important price in that nation. The fact that the long-run trend of the dollar is down highlights the fact that the international financial community continues to believe that there are still structural problems in the United States that must be dealt with. And, one can add, that these structural problems are not connected with one political party or the other. Both parties have contributed to these structural problems and, until there is a major change in the way Americans think, these structural problems will not go away. Hence, the bet is still on a falling value of the dollar.

What are the major structural problems?

Let’s start with just three. First, is the federal government deficit. Again, this is not a problem that has just occurred. The gross federal debt of the United States has increased at a compound rate of about 7% from 1961 through 2009. “Official” estimates of the deficit over the next ten years are for the deficit to increase by $8 to $10 trillion. I have been a little more pessimistic, arguing that the deficits will be more like $15 trillion. The lower estimate will still keep the growth rate of the debt above 7% a year.

Second, the commercial banking system has over $1.0 in excess reserves! The Federal Reserve is planning an “exit” strategy to remove these reserves from the banking system as the economic recovery picks up steam. However, there is little evidence provided over the past fifty years or so that the Fed can or will be able to keep these reserves from getting into the spending stream especially given the amount of the federal debt that is going to have to be financed over the next ten years.

Third, there are major dislocations in terms of the allocation of corporate assets, of corporate capital, both physical and human, in the United States. (See my post http://seekingalpha.com/article/216450-the-source-of-economic-success.) To correct these dislocations will take a lengthy period of time which indicates that the country will not recover as rapidly as it would if these dislocations did not exist. This will just exacerbate the problems caused by the two situations mentioned above. Again, this is seen as a negative in terms of pricing the dollar in foreign exchange markets.

I have been a dollar “bear” for a long time. The reason is that the general thinking about economic policy in the United States has been wrong since the early 1960s. International financial markets seem to support this assessment. And, this thinking appears in both the Republican and the Democratic leadership. I had hopes that changes were taking place when Paul Volcker was Chairman of the Board of Governors of the Federal Reserve System. I had similar hopes when Treasury Secretary Robert Rubin led the charge to reduce the federal deficits in the 1990s. In each case, “the dark side” eventually prevailed.

There is nothing I see in the future to make me think that the value of the dollar will rise except in times of global financial crisis where there is a “flight to quality”. But, these will eventually run out if nothing is done to resolve the longer-run issues. As far as I can see, there certainly is no leader on the present stage that can bring about the changes that are needed. Therefore, I remain “bearish”.

Stein's Law

Perhaps the most profound bit of information appearing in the news this morning concerning the budget proposal of the Obama administration is the citation of Stein’s law by the economist James Galbraith in the New York Times article “Huge Deficits May Alter U. S. Politics and Global Power.” (See David Sanger, http://www.nytimes.com/2010/02/02/us/politics/02deficit.html?hp.)

Stein’s law (as familiarly presented) states that “If a trend cannot continue, it will stop.”

Galbraith also provides us with his own wisdom: “Forecasts 10 years out have no credibility.”

Now to the budget of the United States government!

What is the primary trend connected with the federal budget? Government expenditures will go up, and up, and up. Congress does not have the discipline to stop expenditures from increasing. Neither do presidential administrations.

But, what about the deficit?

There is only one way the deficit can or will be reduced: revenues coming into the government must increase. And, of course, they must increase at a faster pace than expenditures are growing.

This was the pattern in the Clinton administration years, 1993-2001. For this 8-year period, total receipts coming into the federal government rose 7.1% per year. (Note that for the 7-year period of 1993 -2000, the annual rate of increase was 8.4%.)

This contrasted with the compound growth rate of total federal government outlays which rose by 3.6% per year. Thus, the Clinton administration began in fiscal 1993 with a total deficit of $255 billion and recorded a surplus in fiscal year of 1998 of $69 billion, followed by surpluses of $126 billion, $236 billion, and $128 billion.

The major contributors to the growth rate in total receipts was Individual income taxes and Social insurance and retirement receipts. The compound growth rates of these items was 8.7% and 6.2%, respectively. Note that the compound growth rate for real GDP during this time period was 3.5%.

The figures for Bush 43 show a substantially different configuration. Total receipts of the federal government grew by only 3.6% per year during this administration. (Note that the compound growth rate for real GDP was 2.3% at this time.) The greatest growth in revenue came from corporate income taxes which grew every year by 10.5%

There was a surge during the Bush 43 years of total outlays which rose by 8.3% year-after-year. The biggest contributor to this was the outlay for national defense, and these expenditures rose, on average, by 10.2% every year. (Note that in the Clinton administration these outlays rose by less than 1% per year.)

It seems to me that the trend in outlays over the next few years will remain rather high. America is a nation at war! Defense outlays will continue to rise. The question is, how much? This is a unknown known. My guess here is that present estimates are low!

The big question relates to how much other expenditures will rise, expenditures related to health care, energy, global warming and others. The exact cost of this spending are anyone’s guess right now. These expenditures we can put in the category of known unknowns. Given the history of government it is impossible for me to believe that health care reform will not “cost us one dime” as stated by the President. We don’t really know when these other programs will be pushed and expanded, but they still remain on the “to-do” list of the President.

There are always “other” things, the unknown unknowns. You guess.

The trend in outlays is up, but the question is by how much? The mean of the Clinton and Bush 43 years is just about 6% per year!

Is there any way that revenues can come anywhere close to a 6% per year annual increase?

It was done in the Clinton years, but that was with an economy that was increasing, in real terms, at 3.5% compound rate. I just don’t see it over the next 5 to 10 years.

Raising taxes? Are you crazy!

Yes, the Bush 43 tax cuts will not be renewed, but, there will not be any other tax increases that will raise revenues substantially. Not with the unemployment figures captured in the current budget document.

So, what are we faced with?

Given the scenario I have just painted my guess for the sum of government deficits over the next 10 years is from $15-$18 trillion. This is substantially above the $8.5 trillion total presented in the current Obama budget documents.

If this scenario for the federal budget is anywhere close to reality then one could argue that it is the blue-print for an excessive credit inflation in the upcoming years that will be unlike anything we have seen in the past in the United States!

And, what is the good news?

To quote Galbraith, “Forecasts 10 years out have no credibility.”

Whew! You had me scared two paragraphs ago.

Any more good news?

Sure, to quote Herb Stein, “If a trend cannot continue, it will stop.”

The trend commented on above is the growth of total federal government outlays. It must stop! But, it will not stop if the United States is fighting at least two wars, fighting unemployment, fighting for health care reform, fighting for other “musts” on the Presidential “to-do” list, and taking care of those unknown, unknowns that always seem to pop-up.

“If a trend cannot continue, it will stop!”

What is going to make the trend in total federal government outlays stop?

I’ve got my ideas. You go ahead and write your own script!

Headlines of the Day: How Are Governments to Finance Themselves?

More and more attention is being directed toward the problems that governments are having with their financial situation. We have spent so much time this year discussing the problems in the financial industry, in housing, in credit cards, in consumer credit, in business bankruptcies, in debt-swaps, and in commercial real estate, that the plight of governments, other than the federal government, has taken a back seat.

Is 2010 to be dominated by the financial problems of government: federal, state, and local?

The cloud is certainly on the horizon.

Budget and debt problems on the national level have risen to prominence in the last few weeks. Just to list a few, you can start with Ireland, Greece, Spain, Mexico, and Dubai.

Yeah, and what about California and New York?

More and more we are hearing about the sagging prospects for the states and for cities and other local administrative units. See, for example, “States Scramble to Close New Budget Gaps” in the Wall Street Journal, http://online.wsj.com/article/SB126110075141996495.html#mod=todays_us_page_one.

In almost all states, there is some kind of balanced budget requirement. This is also true of many local government bodies. This means that attempts must be made to bring budgets under control.

The problem is on the revenue side; funds are just not coming in at the rate even severely revised budget projections anticipated. And, all of these shortfalls cannot be filled by federal stimulus monies. Certainly some jobs, especially in education, were maintained by federal funds, but this source cannot be continually relied upon.

And, the situation is a cumulative one. Unemployment and non-existent economic growth have caused the revenues of these entities to slow down. This is resulting in more budget cuts, primarily in programs and layoffs which just exacerbate the problem in unemployment and slow economic growth. This in turn slows down the revenue flow even further. And, so on, and so on.

Just as businesses and households are doing, state and local governments are re-thinking what it is they do, what they can do, and how they are going to go about doing it. The de-leveraging and down-sizing are coming after 50 years or so of relatively constant expansion of budgets and programs.

The inflationary-bias that has existed in the United States for the last 50 years resulted in a very prosperous public sector to go along with the very prosperous private sector. As I have stated repeatedly in my posts over the last two years, inflation is wonderful for the creation of debt and for financial innovation, in the public sector, as well as in the private sector.

Ah, thank goodness for gambling, for it seems to be one of the “gap-filling moves” that states are relying on to replace revenue shortfalls. The problem with this is that “planned gambling expansions” are zero-sum games if people, on the whole, don’t increase their gambling activities. And, do we really want people to increase their gambling activities, especially at this time?

But, this leads us back to the federal sector. It seems as if future inflation is the only answer to the consequences of past inflation.

The latest official estimate for the federal deficit for 2010 is $1.5 trillion, up from 1.4 trillion the year before. Even scarier is that the Gross Federal Debt is projected to increase by $2.2 trillion this year, an increase of 18.6% from last year. Even shakier is that the public is supposed to absorb more of the increase in the federal debt than ever before: a rise of $2.0 trillion or 26.9% ahead of last year.

And, these budget figures don’t include the Pentagon “bill” that was passed yesterday with much pork and “earmarks”, buying things that the Pentagon didn’t even want! And, it doesn’t include the new Pelosi “jobs bill” which just passed the house last week. And, it doesn’t include real numbers for the health care legislation. Oh, yes, and where is the $100 billion going to come to help finance the climate concerns of the emerging or developing nations? This was just proposed two days ago. Also, where is the cost of the increased troop commitment to Afghanistan? And, there are four or five other things that could be included in this list.

Where are the funds going to come from to finance all of these expenditures?

In addition, we have a Federal Reserve System that is on the verge of “exiting” from the excessive liquidity that it has injected into the financial system over the past 15 months. The Fed has a portfolio of securities that amounts to $1.835 trillion. The composition of this portfolio is U. S. Treasury securities, $777 billion, Federal Agency securities, $158 billion, and Mortgage-Backed securities, $901 billion.

How is the government going to finance all of the new debt it must place on the market at the same time the Federal Reserve is trying to reduce the size of its balance sheet by selling off these securities?

Furthermore, the Congress is not going to be happy with the Fed selling securities to “exit” its current bloated balance sheet which will cause interest rates to rise at the same time that massive amounts of new federal debt is going to be hitting the financial markets.

Well, the Bernanke Fed is not independent of the government anyway.

So, inflation is the answer! Bring it on!

The interesting thing about the international concern over the financial health of the nations is that the value of the United States dollar has risen. International finance seems to be saying that maybe things in the United States are not that bad when you consider the state of other nations in the world.

As I wrote above, maybe in 2010 a lot more of the concern in credit markets will be with the status of government budgets and government debts. The question then becomes, how long can governments continue to bail out other governments? Maybe as long as some governments can still print money.

Building an Exit Strategy at the Federal Reserve--Part Two

Yesterday, I discussed what I saw as the reasoning behind the strategy the Federal Reserve is building to reduce the massive amount of excess reserves that it has injected into the banking system. The basic strategy seemed to be logical and reasonable and consistent with the way that economists usually think. That is, the arguments of economists always contain the assumption: “all other things held constant.” In other words, this is the plan, given that nothing else changes.

In the proposed strategy the Federal Reserve is developing, what is missing that might be crucial to the success of this strategy?

How about the fiscal deficits that the government is in the process of producing?

The deficit for the fiscal year ending this fall recorded the largest deficit in United States history: $1.4 trillion. And, some projections for the next ten years place the cumulative federal deficits around $15 trillion, more or less.

The Gross Federal Debt rose by 11.6% in fiscal 2008 and the estimates published by the government for fiscal 2009 and fiscal 2010 are 22.3% and 15.4%, respectively. The federal debt held by the public rose 15.2% in fiscal 2008 and is projected to increase by 35.4% and 21.9% in the following two years.

A lot of debt is going to be created by our government in the upcoming future and the assumption is that the public is going to absorb greater increases in the amount of debt they hold than ever before in peacetime!

The increases in debt over the past seven years have been of epic proportions. Carmen Reinhart and Kenneth Rogoff, in their informative new book “This Time is Different”, state of this buildup: “Were the United States an emerging market, its exchange rate would have plummeted and its interest rates soared. Access to capital markets would be lost…” They continue, “Over the longer run, the U. S. exchange rate and interest rates could well revert to form, especially if policies are not made to re-establish a firm base for long-term fiscal sustainability.”

Why do the exchange rates of nations that exhibit such fiscal irresponsibility decline?

The answer to this is that, sooner or later, the central banks of these nations have to become active in supporting the placement of the debt and this results in the monetization of that debt.

The question then arises, “Can the Federal Reserve reduce the amount of excess reserves it has injected into the banking system given the market pressures that surround the problem of the placing of the federal debt that is going to be created?”

Let’s look what seems to happening right now.

Some have argued that the Federal Reserve’s policy of “buying everything in sight” has created an asset bubble. The result has been that the prices in many different asset classes now move together: the movements in these asset classes now possess a high positive correlation rather than a zero or negative correlation. Thus, investors can achieve very little diversification across markets. And, as a consequence, the market volatility indexes have risen to remarkable highs.

The extremely low target interest rates, the quantitative easing, and the massive flows of capital into the United States resulting from the accumulation of foreign exchange reserves by foreign central banks keep Treasury bond prices high, prices of mortgage-backed securities high, United States equity prices high, and global asset prices high. (A bubble you say?)

To support the bond market and the market for mortgage-backed securities, that is, to keep interest rates low, the Fed has continued to pump reserves into the banking system. The reserve balances that commercial banks hold at Federal Reserve banks jumped $236 billion from September 30 to October 28 so that they totaled $1.080 trillion on this latter date. Excess Reserves held by commercial banks rose by around $190 billion from the end of August to the end of September, to around $1.0 trillion.

If these security prices are artificially high (and interest rates artificially low) due to Federal Reserve support, what will happen when the economy picks up activity and the Fed has to back off its underwriting of low interest rates? What will happen if this “backing off” coincides with the need of the Federal Reserve to “exit” from its excessively loose policy?

As I wrote earlier, the proposed exit strategy that the Federal Reserve is exposing to the public seems “logical and reasonable” given that “all other things are held constant.” Unfortunately, policy makers do not work in a world in which “all other things are held constant.”

Again, the policymakers are faced with the problem of dealing with the aftermath of earlier policy actions. As I have argued, the irresponsible fiscal policy of the early 2000s and the excessively low interest rates maintained by the Federal Reserve during this time (supported by both Greenspan and Bernanke) created the environment for the financial collapse of 2007-2008. The Bernanke Federal Reserve faced this collapse, to accumulating accolades, by throwing everything it could against the wall to see what would stick. (The lesson Bernanke learned from his research on the First Great Contraction was that in order to avoid a great contraction one had to leave nothing on the table for if one is going to err one must err on the side of excessive ease.)

Now we are faced with the problem of dealing once again with the left-over’s of previous fiscal and monetary policy. We are once again faced with a situation in which there are no “good” policies that are painless. As Reinhart and Rogoff conclude from their massive study of “Eight Centuries of Financial Folly”, pain cannot be avoided once financial folly has been committed.

Let me close once again as I closed my post yesterday: the Fed is in a delicate position. They cannot get out of this situation by “throwing everything it can against the wall.” Let’s just hope that they can find a way to get out of their conundrum with the least amount of negative consequences.