As I write this on July 29, I am reminded of the PR campaign the Fed embarked on early in 2010. In essence, the Fed was concerned with the prospects of the U.S. entering into a Japanese style deflationary environment, so it anointed James Bullard, president of the St. Louis Fed, and sent him out to grease the wheels for QE II.
That was necessary because after the T.A.R.P. program of 2008, the American taxpayer was not warming to the idea of another round of government spending/stimulus. A few minutes ago, CNBC announced that the very same James Bullard would be their guest in about an hour. Hmmm. A few weeks ago, the Fed hinted at QE III, and with the economy slower than most believed, I think we're about to witness the sequel: Fed PR part deux. Get ready for more monetary expansion.
But that's not the solution. Most of the money from QE II is bottlenecked at the Federal Reserve and commercial banks. The problem: People aren't borrowing. Therefore, more money will not solve the problem!
If Congress does indeed move forward on budget cuts (the bipartisan deal may well become law on August 2, if the Senate, as expected, passes the debt ceiling bill the House passed on August 1), unemployment will rise as many workers will lose their jobs. Any jobs connected with the industries affected by budget cuts will suffer.
All the Fed can do is throw more money at the problem just like government has done for years. No matter how you slice it, it seems clear that we are in for a rough ride for a while.
How can we get out of this mess? To fix this, we need to address the demand side of the equation, not the supply side. Reducing taxes would put more money in taxpayers' pockets, and after they pay off debt and increase savings, they will eventually get back to what they do best....spend! This approach would cause things to get worse before they improve, but in my view, it is the only viable "long-term' option. Anything else is just delaying the inevitable. If not now, then when?
What do you think?