Tuesday, February 5, 2013

Morici: Fed and ZIRP Will Cause Financial Collapse

From MoneyNews, Peter Morici, hardly an irresponsible economist who is a professor of economics at University of Maryland and former chief economist at the US International Trade Commission, succinctly summarizes the end game of continued zero interest rates, money printing and bond buying by the Federal Reserve:

The Fed has become “an enabler of presidential and congressional inaction [on entitlements, etc.] by keeping interest rates artificially low for five years and now by printing money to buy U.S. bonds and mortgage backed securities at a $1 trillion annual pace,” he writes on his blog.
“Record low interest rates are propping up weak consumer demand but sowing the seeds of another financial crisis.”

Urban real estate is rising to unsustainable levels, as are junk bonds, Morici says. The Fed’s low interest rates have helped push student debt over $1 trillion, with one in six loans in default. The easing also has allowed many states to avoid pension reform, he adds.
“Inevitably, all that money will push up inflation, and then the Fed will be compelled to stop buying bonds and let interest rates rise to levels the federal and state governments can't bear easily,” Morici writes.

“Financial markets will collapse, again!”
Well said!  That said, it seems high inflation is pushed off into the future.  One wouldn't normally expect inflation where there is such slack in the labor market and plenty of supply of cheap goods from abroad.  But we're in uncharted territory.

But even after all of the $1 Trillion deficit spending, trillions of money printing and trillions of bailouts, the economy remains weak.  Last quarter's first estimate of GDP was slightly negative.  With the restoration of 'normal' payroll taxes and new taxes enacted in January, it appears likely that the 1st Quarter of 2013 GDP may be negative as well.   If true, those new taxes would qualify as a policy mistake--something that all of the Republicans tried to argue.  It would appear that ANY austerity (just reducing the rate of spending growth--not absolute cuts) will create negative growth, something that the UK has found by trying to trim the growth of spending.  The UK has had negative growth for 12 out of the last 15 months.

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