Tuesday, May 6, 2008

Our Economic Moment

Tim Duy has some reflections on our current economic situation that I found worth reading. He sees a period of what he calls "economic purgatory" as the Fed bails while the boat keeps leaking -- a purgatory where interest rates remain low, the dollar weak, economic growth tepid, and inflation worrying but not oppressive. This would allow the US to gradually adjust to the macro imbalances (under-saving and over-borrowing on an overly strong dollar) that caused our problems to begin with, without having to go through a deep recession. While that sounds nice on some level, and is certainly a coherent macro forecast, I see this purgatory as way worse than hell itself. The article goes on the make much the same point, though in less polemic terms -- by keeping rates low and bailing out all the bad loans, the Fed would be indirectly fueling a commodities and inflation bubble of enormous proportions via the leverage of the Asian and Middle Eastern pegs to the dollar. It seems to me that after a lull, this would come home to roost in the US, and we'd be back in the horrendously stagflationary 70's, which would then precipitate another dollar crisis and a final re-adjustment even worse than the one we might expect if we let it happen now. After all, when has the government's monkeying around in the economy ever turned out for the best? I would prefer to immediately take the same medicine the IMF gave to Korea and the rest of the world ever time it got into this sort of trouble -- higher rates, greater austerity, let the market do its job, it's much smarter than you are.

No comments: