No Way Out

August 11, 2010

In the risk-averse first twenty-four hours after the Federal Open Market Committee statement,

  • The yen and dollar advanced 2.5% and 1.9% against the euro,
  • Ten-year Treasury yields dropped twelve basis points, and the two-year maturity slid back to 0.51%,
  • The Nasdaq, S&P 500, and Dow Jones Industrials fell by 2.5%, 2.2% and 1.8%, and
  • Oil fell 1.9% and below $80 per barrel.

The Fed’s actions were predictable and in fact not as forceful as what officials might have tried.  A net rise of the central bank balance sheet was not decided, and the economic assessment still embodies positive growth ahead, but at a slower than assumed previously.  Any less significant change would have untrue to the data that the financial community has been watching since late June.

Investors must read between the lines, and so did the press coverage in the New York Times and Financial Times.  Headlines in a front-page NYT article by Sewell Chan called the actions taken a “turnabout” and predicted “bolder steps if jobs market lags.”  Selected quotes from analysts were even more alarmist.  One called the moves “a bit of a feeling of panic by the Fed.”  Another talked of “political cover against a backdrop of a gut-wrenching economic correction that shows no sign of ending anytime soon.”  The largest-font headline in today’s FT blares “Fed downgrades outlook,” and the sub-headings read “Monetary policy bias shifts toward easing” and “Fears growing over double-dip recession.” 

Further commentary in the FT back-page’s Lex column makes a point that has been haunting my own present thinking.  To use a medical metaphor, governments around the world treated the Great Recession with their most daring procedures and toughest drugs.  The patients generally got better, although not to the same degree.  The convalescence of older patients, metaphorically here being those economies that industrialized long ago, has been spottier than for those countries whose economies are still developing.  Experts running simulations of what would have likely occurred without the policy support calculate that the world economy would have been much sicker if officials had done nothing.  But the medicine only bought a bit of time.  Disease remains, and undesirable secondary threats to patient health place constraints on future treatment.  

It is feared that new doses of the same medicine will produce a diminishing positive response in the patients and perhaps not even be tolerated by others.  Some politicians scream, “enough is enough!  It’s time to step back, and let nature take its course.”   Others want to maintain stimulus until the patient is sufficiently able-bodied to regain a sustainable path to normal health.  Only then can detoxification from over-reliance on the medicine begin.

What if both these views are wrong?  Maybe it’s not possible to regain the old quality of economic life no matter what policy decisions are made.  We know from  history that civilizations, like people, have followed journeys with a beginning and an end.  For a patient who is terminal chronically disabled, a time is inevitably reached when no more intermediation will help.  Medicine can’t be tolerated, and letting nature take its course doesn’t restore youthful health.  The process of creative destruction in economic theory is played out in countries as well as between industries and businesses.  Britain and Japan never returned to their respective pre-WWI and pre-1990 glory.  Younger nations with greater dynamism and potential seem to hold the future. 

To stimulate or not to stimulate.  The answer to this question dividing American voters and political parties may be that there is no acceptable answer.  Both courses of action could fall well short.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.


One Response to “No Way Out”

  1. Jimbo says:

    There seem to be some “young bucks” entering the world market in a major way. Our sales are doing well in Brazil, India, and most Asian countries. U.S. companies still make good products – just have to view the whole world as customers to be successful now.