Fed Chairman Bernanke has to Choose between Three Ugly Paths

One of the fallacies of gross domestic product (GDP) is that it doesn’t differentiate between those activities that advance a society and those that do not. Over a period of centuries, as nations have increased their GDP, they have increased the life span of their citizens, a valid argument for an investment of a people’s national effort to advance their society. Over the last three decades while America has suffered epidemics of obesity, diabetes, heart disease, Alzheimer’s, and cancer, dramatically reducing our national health, our share of GDP for healthcare has escalated, obviously a bubble by societal advancement standards. Similarly, while trillions were spent on housing stock during the past decade, the resulting bubble measured as a grand GDP, yet it actually produced excessive, obsolete housing and a mountain of debt created money that collapsed as the bubble popped.

While Japan’s tragedy will undoubtedly produce jobs for many and wealth for a few as it registers a higher GDP for Japan and her suppliers, all of the expended labor to rebuild what once was is just that. The labor expended is labor that otherwise would have advanced Japan beyond the point of which she will merely return. Similarly, the world’s finite commodities will be lessened just to bring her back to square one. After a period, Japan’s infrastructure will return as a result of expending hundreds of billions of additional debt. However, the leaking nuclear reactors will damage her real value creating GDP for decades. Brands from fish to cars to computer chips may well be negatively impacted by leaking radioactive isotopes.

Japan is a nation of savers and will ultimately recover. America is a nation that is struggling to even determine what marginal debts to expunge from its massive core debt. Unfortunately, as a result of our inaction, Bernanke has a lose-lose choice to make regarding monetary policy. His three choices for quantitative easing no longer can increase America’s real GDP but could destroy it considerably.

If he actually stops quantitative easing and contracts the money supply, as he earlier promised, our economy is going to tank, and inflation will still continue to erode our purchasing power. With a falling stock market, rising consumer prices, lower wages, lower home prices and higher unemployment, Bernanke will singlehandedly give a landslide election to the Republicans in 2012.

If he continues with QE3, he will stave off recession and buoy stock prices for a bit but he will commit America to a path of accelerating inflation. He may be able to postpone a crash until after the election, but without a disciplined monetary policy and implementation, the choice of when America crashes, as Standard and Poor’s has alluded, will be taken from him as the world financial community imposes discipline on America.

If Bernanke simply quits QE2 and begins to slowly raise interest rates to keep pace with the EU, as is his stated course, he will give Congress time to act boldly before the world reacts. But his sacrifice will be for not because Congress won’t follow his lead. He will certainly douse the already tepid economy. With no hope of recovery, and no signs of life from Congress, America’s middle will grow restless and her uberwealthy will use the calm before the storm to race offshore. America’s enemies and opponents will act boldly during our internal distraction.

We now ask Bernanke to decide our fate after a generation of our decisions placed this burden on him. WWII led to too many baby boomers who believed our parents when they told us we would have a better life because of their sacrifices. Determined to create that better world, we continued to fight a two front war against the communists and poverty while choosing to create wealth from ideas instead of factories, and implementing our vision of schools that would fail to graduate a third of our would be thinkers. If our parents created wealth in houses and the stock market, we would create more wealth by borrowing to invest in bigger houses with walk in closets, and in bulging stock markets whose mavens convinced us our borrowed funds would create more wealth in overseas factories than in American workers.

Sure, to have it all, we would have to agree that our government should borrow almost as much as we contributed through taxes to pay for lost jobs, poverty, and a military so gargantuan that no-one who picked on our parents would ever think to pick on us again. Our concepts of wealth creation worked for some, but for most… not so much.

And now that our failed middle aged ideas have threatened to end our dreams of creating a better world through an endless expansion of the money supply, we have pulled the slot machine handle with our last three quarters of Stimulus, QE1 and QE2. Peaking through our government issued rose colored glasses, we hoped to see but failed to get even a single cherry.

After watching our post war babies mature into elected officials who failed to cut even 100 billion from this year’s budget deficit of 1,500 billion, we must now solemnly ask Bernanke to make his decision… in this moment…. just after his first ever Fed press conference. Please, Dr. Bernanke, choose what’s behind door number 1, door number 2, or door numberrrr 3.

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Filed under American Governance, Federal Reservre, U.S. Monetary Policy

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