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Without Addressing Systemic and Structural Imbalances

The Economist: “The Fed's have-it-both-ways policy”

August 31, 2011

R.A., regarding Bernanke’s Jackson Hole speech, your column notes that you “found the tone on monetary policy to be confusing and timid.” Expectations now turn to what President Obama will say next week and what the Fed will do (or not do) when they next meet. Uncertainty again prevails.

Without sounding trite, we are in need, as the old adage goes, of “one-handed economists” in a situation like this. In the wake of the global financial and economic crisis, governments are aiming to jump start growth by supporting consumption, stimulating the economy and encouraging exports. To do this they need to keep their currencies relatively weak. In the US (and Europe) currency debasement is taking the form of “quantitative easing.” Despite recent statistics showing some respite from global inflationary pressures, governments worldwide, including the US Fed, should be increasingly concerned about the inflationary impact of their policy responses – i.e., QE3 -- to flagging economic recovery. Further, the actions currently considered by governments and central banks are pretty much the “two-handed economist’s approach.” Rather than building a bridge over the river, they end up building a bridge alongside the river. In essence, the measures are of a stop-gap nature, and what is needed is a set of radical actions to address the structural weaknesses that are imperiling the global economy.

As the US Fed continues to ponder QE3, they should consider that inflation is a factor of global economic security that has the innate capacity to upend carefully laid plans and further upset the equilibrium. Worryingly, none of the responses that have emerged so far appear capable of addressing the economic security risk of creating inflationary pressure in a period of stagnating growth. Addressing these issues would inevitably require structural changes in the developed economies that do not just scratch the surface but address the integral sustainability of the global economic model that prevails at present.