“Helicopter’ Ben Bernanke, the retiring Fed Chairman, regretted in his las speech that the government had not spent more in its response to financial collapse since 2008. ‘Helicopter” Ben was awarded his nickname after a speech wherein he equated the Fed’s capabilities with the distribution of money by dumping it from helicopters. Mr. Bernanke et al have been and remain disciples of J.M. Keynes, who saw government spending as the solution to divers economic policy failures. Bernanke and co. share one curious blindness: They never seem to deal with the source of all the money they want government to spend. (Keynes himself did a bit better.)
As we have done before, we liken such spending to transfusing a sick patient with blood that first was drained from him. We say that because the spending reflects, with our present deficits, borrowed money that must be repaid, with interest added. Much has been borrowed from China and Japan and others and must be repaid to them. When fear for future repayment closed those sources, the Fed started its ‘Quantitive Easing’ (printing money) which amounts to borrowing from future US taxpayers.
The financial Pied Piper has not yet come to collect our children because the worse condition of so many other places on our same path has forced them to US investments as the (!) safest harbor extant, thus shielding the dollar for the moment. But the recently approved (by both parties) budget with continued deficits assures a continued course toward financial disaster; even countries cannot continue spending money that does not exist in reality. That is emulating Wily E Coyote of the old Roadrunner comedies who ran safely off the clif, falling only after he looked down. When the US stock market next crashes, we will know that we have looked down and those remaining with 1930’s experience will reprise “deja vu all over again!”
Europe’s erstwhile debt crisis has, though now unremarked, not departed nor can the US or several other countries pay the debts they owe. If you’re a US taxpayer, when will you be able to repay the $150,000 that is your share of the US debt? If lenders start to worry about repayment, they will refuse to roll these debts over but at increasing interest rates that accelerate the problem.
As mentioned above, we stumble along until the stock market crashes again, forcing everyone–even politicians- to face reality. The amount of emotion now influencing stock prices has apparently been increasing, adding to volatility. That fits these times. The condition is often called a “yo-yo market” and historically carries a risk of wide swings in valuation. When large enough dip occurs in the market, the investments held by banks lose value, resulting in a reduction of bank capital that renders some insolvent. Too many insolvent banks at once put you into the 1930’s again and that is one risk we are facing. Another is the risk that the ocean of printed money will dilute the purchasing power of existing money, producing inflation. Our government is running us between a financial Scylla and a fiscal Charybdis, apparently while blindfolded.
‘Helicopter’ Ben has abandoned a ship taking on water. His replacement, Janet Yellen, the prior number two at the Fed, is expected to be another Bernanke. If so, the Fed is likely to continue funding the government’s overspending until, one way or another , the Damoclean sword falls. But Fed Chairfolk have not always done the expected; We will have to see. Either way, the date of the next market crash will likely be a ‘Roadrunner Moment ‘