“Now this is not the end. It is not even the beginning of the end. but it is, perhaps, the end of the beginning.”
— Winston Churchill, Nov. 10, 1942, Announcement of British victory over Germans at Battle of El Alamein
Many economists now say we are at the end of the beginning of our current recession.
After going “all in,” we have gained some respite from the economic onslaught. “All in” is a poker term that refers to betting all of one’s poker chips.
Metaphorically speaking, Uncle Sam has piled up enough poker chips to reach to the moon. We need even more chips. We project deficits of at least $1 trillion annually to 2019.
But before declaring victory, we must evaluate the economic carnage. From the individual to the state, we need to rebuild our balance sheets.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” warned Federal Reserve Chairman Ben S. Bernanke, at a June 3 congressional hearing. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”
Bernanke has helped steer the administrations of Presidents George W. Bush and Barack Obama through a tortuous course.
On the one hand, as a scholar on the Great Depression, he does not want to repeat New Deal prescription errors. Specifically, from 1929-1939 our tepid monetary and fiscal responses failed to jump-start the economy.
On the other hand, Bernanke worries about our long-range fiscal health. By 2019 the federal deficit will, percentage-wise, greatly exceed the previous historical peak reached during World War II.
A June 18 New York Times/CBS News Poll revealed that most Americans feel that federal deficits are our No. 1 economic problem. Bernanke has unleashed a tidal wave of money to fight the global recession. The nation’s monetary base — consisting of bills and coins in circulation plus banks’ deposits at the Fed — has climbed 114 percent from May 2008-09. This compares with our previous biggest annual increase of 16 percent.
Why has the money supply splurge not caused a spending spree or an inflationary spiral?
Core inflation over the past 12 months remained at 1.9 percent.
One reason is that our frightened banks have used their added reserves as a safety net rather than lending out idle funds and expanding credit. By keeping reserves, the banks have stymied a phenomenon called the multiplier effect.
In economics, the multiplier effect is the idea that an initial amount of spending leads to consumption by the new recipients. Spending reverberates and results in an increase in national income greater than the initial amount of spending.
Another reason is multitrillion-dollar spending cutbacks by consumers. Household debt soared from two-thirds of gross domestic product in the early 1990s to 100 percent at the end of 2008. To return to the household debt ratio of the early 1990s, we need to pay off an additional 25 percent, or $3.5 trillion.
Alice Rivlin, the first director of the Congressional Budget Office, testified before a congressional committee on June 18.
“Federal expenditures are projected to grow substantially faster than revenues, opening widening deficit gaps that cannot be financed,” Rivlin said. “Unpopular actions to restrain future spending and augment future revenues must be taken now, even before recovery has been achieved. Putting Social Security on a sound fiscal base, credibly reducing the rate of growth of federal health spending, and raising future energy-related and other revenues are all actions that could be taken now to reduce future deficits.”
After World War II ended, our greatest generation restored our fiscal health by insisting on fiscal conservancy. We need to take similar measures to provide for future generations.
Originally published in the Sarasota Herald-Tribune
