You see, Ben S. Bernanke succeeded Alan Greenspan as Chairman of the Fed on January 31, 2005. He is eminently qualified and holds a “platinum” resume for the job. Last week, Bernanke addressed Congress for the first time as Chairman, and his words were clear and well-received by the financial markets. Controlling inflation will be a priority, meaning we can expect more interest rate increases in the near term. We also know from earlier writings and speeches that he greatly fears deflation--the situation where the price of goods/services drops because consumers are not buying. They just do not have the funds, and they cannot get them.
Alan Greenspan is also a brilliant man. But... during his tenure as Chairman, we saw the unprecedented growth of our National Debt and money supply (the printing of money). BOTH more than doubled! While blame for the recent explosion of the Budget deficits rests with a profligate Congress, and a President who has yet to exercise ONE Presidential veto, Greenspan sought to keep the global economy rolling by taking interest rates effectively to zero for years. It is the Chairman and the Fed Governors who “create” and regulate the funds available. By a series of 14 quarter-point increases, rates are back in the neutral zone.
Zero interest policies did not work for Japan throughout the 1990’s, and have not worked for US/us in the past ten years, either. Cheap money kept Americans consuming/spending, but building McMansions, acquiring the latest technological toys, and driving SUV’s did not lay any foundation for future growth and prosperity. Greenspan’s “solutions” only compounded our underlying problems. We’ve had the party; now Bernanke must keep financing it.
The US is presently “thriving” only because of the largesse of foreigners. The Japanese, the Chinese, the Euro Zone, and the Arab OPECs now hold over 45% of our outstanding privately held (national) debt. Our record trade deficits are sucking up approximately two BILLION dollars a day in additional foreign “investment” to keep Americans consuming goods and energy at present levels. Our national saving’s rate has been running near zero for some time now. In 2005, it was FINALLY admitted our saving’s rate was negative--meaning we consumed more than our incomes and capital appreciated--combined.
The Fed and its policies can make or break an administration. Their monetary and fiscal policies provide the financial “lubricants” for the American (and global) economies. How they manage the buying power of the US dollar by controlling inflation and preventing deflation has worldwide implications. But... so many factors which will impact the buck and the future of interest rates are now beyond our borders and the Fed’s real control.
Bernanke will face challenges that go far beyond walking a tightrope. He will be playing Russian roulette with five bullets in the revolver’s chamber. Instability in the Middle East is a bullet. The escalation of energy demand and resultant price increases is a bullet. The levels of outstanding consumer and mortgage debt are a bullet. The twin deficits (budget and trade) are a bullet. The record level of the foreign holdings of our debt and our reliance on the huge daily infusions of additional foreign capital are a bullet.
Chairman Bernanke and the Governors of the Federal Reserve Bank face truly hard decisions. Will they do what is necessary in the best/long term interests of this nation’s survival, or will they do what serves current political/financial expediency merely deferring and compounding the problems? I hope and pray they make the right choice.
I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
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This story was published on February 21, 2006.