Care About America’s Financial Mess or Just Print More Money?
George Leong: Money printing by the Federal Reserve will continue into the near future. And while it will help America avert a recession, the flow of easy money will be disastrous over the longer term.
The reality is that the current bull market and rebound in the housing sector that has made some people very rich is a by-product of the Federal Reserve, as the central bank has built this artificial economy in America that’s driven by the availability of cheap money. Recall the subprime mortgage crisis in 2008 was also driven largely by cheap money.
The problem is that the Federal Reserve had some tough decisions to make. Either let the country revert back to a possible recession or offer loose monetary policy to drive spending. Of course, the Federal Reserve only really had one choice.
While I agree with the Federal Reserve, with the economy now in recovery, you kind of have to wonder why the Federal Reserve continues to allow the flow of easy money; based on the central bank’s policy statement from its Federal Open Market Committee (FOMC) meeting last Wednesday, the cheap money will continue. The Federal Reserve will continue to buy $85.0 billion a month in bonds, adding to its debt in the process.
The Federal Reserve said it would maintain its interest rates at record-low levels until the country’s unemployment rate falls to 6.5% from the 7.7% in February. However, the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive debt. In reality, achieving an unemployment rate of 6.5% may not happen until even later, based on current jobs creation. (Read “What the Government Doesn’t Want You to Know About Jobs Creation.”) According to the Federal Reserve, the unemployment rate will fall to 7.3%–7.5% this year, 6.7%–7.0% in 2014, and 6.0%–6.5% in 2015. The longer-run projection is 5.2%–6.0%. (Source: Board of Governors of the Federal Reserve System web site, last accessed March 22, 2013.)
Another problem is that the low rates will drive consumer debt higher, given the propensity to spend. According to the Federal Reserve Bank of New York, aggregate consumer debt increased by $31.0 billion in the fourth quarter, which is not a big change; however, consider the amount of consumer debt at the end of 2012 was an astounding $11.3 trillion. (Source: “Quarterly Report on Household Debt and Credit,” Federal Reserve Bank of New York web site, February 2013.) The amount is below the record $12.7 trillion in the third quarter of 2008, but it’s still high and extremely vulnerable to higher interest rates.
Even the sequestration appears to be doing little to help the situation. Sequestration budget cuts are already at $18.6 billion and running (source: USDebtClock.org, last accessed March 22, 2013), but as I have said many times in these pages, $85.0 billion a year will likely do very little to tackle the mounting national debt. Just the interest on the national debt is already near $223 billion, so the national debt will continue to expand despite the sequestration cuts.
So, here we are. More of the same, and I hope the Federal Reserve is correct. But the more I look at the size of the national debt, the more squeamish I get. With the national debt at $16.69 trillion and growing, the Federal Reserve continues to print money, creating an artificial economy that is giving people a false picture of how America is doing. The U.S. national debt as a percentage of gross domestic product (GDP) stood near 103% in 2011, just below the massive 208% in Japan and the 161% in Greece, according to the International Monetary Fund (IMF).