10.31.2010 0

Fed Stimulates the World, Not the U.S.

  • On: 11/19/2010 09:12:18
  • In: Fiscal Responsibility
  • By Robert Romano

    One curious effect that is becoming evident from the Fed’s ongoing easy money, low-interest rate policies, most recently with beginning purchases of $600 billion of U.S. treasuries, has been to stimulate overseas investment, where emerging markets are growing substantially, reports Bloomberg News.

    “U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007,” according to Bloomberg’s David Lynch.

    This has resulted in billions of dollars of overseas investments in Mexico, Peru, South Korea, Brazil, eastern Europe, China, India, and Russia, according to the report. These investments “illustrate why the Fed’s second round of bond buying may not reduce unemployment, which has stalled near a 26-year high.” Despite all of the cheap money, it is not being invested here.

    In fact, U.S. unemployment has been at or above 9.4 percent for 18 straight months, the longest period of sustained high unemployment since the Great Depression. That result has given cause to Representative Mike Pence (R-IN) to introduce legislation eliminating the Federal Reserve’s dual mandate. Currently the Fed’s statutory mission includes maintaining full employment, a task that it has not succeeded in, despite more than doubling the money supply since the financial crisis began in 2007.

    “Since 1977 the Fed has been forced to develop monetary policy that balances concerns for employment and inflation,” Pence said in a statement. “The bill I’m introducing today will end that dual mandate and put the Fed back in the business of solely focusing on price stability and preventing inflation.”

    Pence continued, “The Fed’s QE2 decision earlier this month to print $600 billion, as an attempt to reduce unemployment, is another example of the failure of its dual mandate.”

    Former Alaska Governor Sarah Palin too was critical of the Fed’s failure to reduce unemployment by printing money and monetizing the debt in a recent letter to the editor at the Wall Street Journal, writing that a “8.7 percent 2012 unemployment rate [is] predicted by the Survey of Professional Forecasters of the Federal Reserve Bank of Philadelphia. It seems the Obama administration’s record spending binge won’t result in job creation, but in unacceptably high long-term unemployment.”

    And while the Fed has managed to keep interest rates relatively low, fueling overseas growth, that may be coming to an end. Palin notes, “[L]ong-term interest rates have actually gone up following the Fed’s recent QE2 announcement. The markets took one look at the Fed’s pump-priming plans and decided they had to increase interest rates — probably in order to compensate for the expected rise in inflation.”

    Ten-year treasuries have jumped from a low of 2.4 percent to about 2.9 percent since the Fed’s announcement, indicating higher borrowing costs for the government on the horizon. Currently, the Fed owns about $859 billion of treasuries, and is on pace to accumulate more than $1 trillion in just a few months, making it the top lender to the U.S. government in the world, more than China or Japan.

    CNBC host Larry Kudlow recently said on the John Batchelor Show that the Fed’s purchase greatly alarms Americans, and “reeks of bankruptcy.” After all, the Fed is buying an increasing share of the U.S. national debt by simply printing money. Kudlow believes that it’s time for the Fed to begin targeting a strong and stable dollar, instead of unemployment with which it has little control. “Can the Fed print jobs?” he has repeatedly asked of late on his show, The Kudlow Report.

    All the criticism against the Fed, from Palin to Pence to Kudlow to China to Brazil to Germany, prompted former Treasury Secretary John Snow to worry that although “the central bankers have become indispensable for both macroeconomics and regulation of national economies, they still lack one critical thing: the political mandate to address the root problem. That can only come from our national leaders.”

    Snow agonized about “[u]nrest among the citizenry” and “resistance to quick action on the hard choices necessary to deal with the underlying imbalances” as if the problem the Fed’s unprecedented actions were not its failed prescriptions, but the people’s perception of them.

    This should be startling to most Americans. A political mandate is not generated by politicians in Washington. It comes from the consent of the governed. And judging by rising commodities inflation, higher interest rates on the horizon, and persistently high unemployment the Fed has failed to address, not to mention the easy money fueling overseas growth, that consent will not be given freely to faceless bureaucrats at a central bank.

    In fact, the American people would prefer that monetary policy be carried out by their elected officials, who at least if they mess up and the prices of staples like food and gas soar, can be voted out of office.

    Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.

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