Obama's task is to delay the collapse of the economy before the elections

Obama's task is to delay the collapse of the economy before the elections
For this, he has the last lever - an emission that will cause inflation, but will give local growth

As you know, last week a meeting of the Federal Open Market Committee (FOMC) of the US Federal Reserve was held, which approved the decision that for quite a long time, two years, the discount rate will be at the current, almost zero level. In this case, three members of the FOMC voted against this decision, the more interesting it would be to know what considerations they were guided by. And the first of the “dissidents”, the president of the Federal Reserve Bank (FRB) of Philadelphia Charles Plosser, made his statement. He began quite toughly: "The recent promise of the US Federal Reserve System (FRS) to keep the base rate low at a low level for the next two years is an inappropriate policy at the wrong time."


According to him, the Fed's statement disagrees with his personal ideas about the necessary monetary policy, since “it (the policy) should be determined based on what happens in the economy, and not be tied to a precise schedule,” reports Reuters news agency. “I took the Fed's message on the state of the American economy as very negative. There is little confidence, and from such statements it will not be any more from businessmen or consumers, ”Plosser explained his position.

Actually, this statement is a demonstration of the fact that it is impossible to sit back in the situation in which the US economy is located and which requires action. However, it should be noted that the opinion of Plosser still seems controversial. And not in the part that relates to the criticism of the Fed: here, in general, there can be no objection. This is a constructive component. The fact is that the main driver of the crisis is the spontaneous reproduction of normal economic proportions, which have been seriously distorted over the past 30 years. And I think that Plosser understands this - like many others, with the exception of the inveterate monetarists, for whom there is no concept of inter-branch balance and no real sector at all - only financial.

But then the problems begin. If the main imbalance is the excess of private (and state too) demand over incomes, and the current crisis is a spontaneous drop in demand, then there may be three principal outcomes, roughly speaking. The first is to accelerate the fall in demand, eliminate disproportions, reach an equilibrium level and begin a rapid growth. The second is to somehow increase revenue. The third is to pull the tires as long as possible, counting on the “miracle”, i.e., that there will be some new way to raise demand.

The second option can be immediately discarded: it is not feasible today, the corresponding mechanisms are unknown. The first one is quite feasible, for him, for example, to raise the cost of a loan (discount rate) rather sharply in the style of the beginning of 80's, or, a little differently, to arrange hyperinflation. Raising the cost of credit will bring down the financial system, and then the real sector will fall, inflation will do the opposite. The only problem is that our estimates of the scale of the fall (I don’t know if they understand the Fed, and if they do, who and how) show that even very high growth from such a low starting position may not lead to economic recovery foreseeable future, not to mention that it is almost impossible to make such a decision politically. The current advantage of the USA in the world is based, in particular, on the technological advantage, and with such a decline it will definitely be lost - with all the attendant problems.

Note that Plosser, who, apparently, advocates precisely for this option, most likely comes from the logic of “a terrible end is better than horror without end”, but does not give its own assessment of the extent of the recession, nor a set of measures that would allow in this scenario, keep the technological circuit in the USA. Maybe because he didn’t think about this topic, and maybe because he doesn’t see a solution ... In any case, given this circumstance, his words look rather weak.

But the policy of Bernanke and the main part of the leadership of the Fed is just the third scenario. To wait and pull, to pull and wait - there is nothing left for them just because there are no constructive proposals. We note that President Obama agrees with them: in his last interview, which has not even been fully published, he said that the United States is not facing a new economic crisis, but the recovery of the country's economy is not going fast enough due to unemployment. “I do not think that we are in danger of a new crisis. However, there is a risk that economic recovery will be too slow due to the critical unemployment situation, ”the head of the White House said in an interview with CBS, the excerpts of which were published on August 17 of 2011. Obama stressed that "this is why we must do more" to solve the problems facing the country.

It is clear that about “not threatening” is a pure policy, since the real state of affairs is known to specialists. But Obama has only one term - the November 2012 of the year, and he needs to reach out to the elections without a collapse visible from a mere glance. What will happen next - it is not so important, in contrast to the leadership of the Fed. For this, he (along with the Fed) has the last lever - high emissions, which, roughly speaking, translates the deflationary scenario into an inflationary one, but gives local growth, which can give people hope. By the way, the Republicans have already strongly scolded him for the very idea of ​​using the emission as a tool in the election campaign. Sense, though, a little ...

Another thing is that in order to reach the spring (before the emission goes “into the sand”, since the inflationary wave will knock off all the positives from it), something else needs to be done, since the demand is falling and the negative in the economy is growing. I can’t imagine what the Fed will do now, but who knows, they promised something at their last meeting ...

In general, the picture is extremely interesting and ambiguous. There are no simple answers, and in this sense any criticism in the Plosser style does not give any effect - precisely because of the lack of a system construct. At the same time, the local constructive (i.e., actions that will make it possible to stretch the situation for at least another six months, before the last “reserve of the main command” is put into action) is also not very clear, and the Fed must present it literally in the coming weeks ... In general, we will monitor the situation, while everything turns out very interesting.
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