Have we just traded the 1930s for the 1970s? The decision by Ben Bernanke and the Federal Reserve to pump an additional $1 trillion-plus in the economy, while not as sexy a story as AIG bonus-gate, has far greater long-run importance. Already we are seeing the dollar fall and gold rise as the prospect of higher inflation begins to seep into asset prices. (So long energy price tax cut.)
And make no mistake, part of this is driven by the prospect of superhigh long-term budget deficits. Who's going to buy all those bonds? Not just Rising Asia, apparently. The Fed's plan to buy up to $300 billion in Treasuries may be just the first installment. And the end result may be a double-dip recession (or a period of anemic growth) as the Fed eventually tries to reanchor inflation expectations by pulling all this monetary stimulus back out of the financial system. (Or we could let inflation rise and inflate away our big deficits. Bad idea.)
Team Obama, though, is forecasting the economy will grow at an average rate of 4 percent from 2010-2012, a pretty good clip. That, however, seems like a less and less credible scenario. In a way, the 1970s was our Lost Decade just as the 1990s was Japan's. Look, if I had to choose, I would rather have a repeat of the stagflationary 1970s than the Great Depression of the 1930s, certainly. And apparently, so would the White House and Bernanke. But I would rather see a prosperity plan than a mere survival guide coming from Washington.
Start the discussion! Be the first to comment on this story.