The Fed’s first news conference, held this week, apparently passed off well. It is difficult to understand why the press did not ask more and tougher questions. They have been waiting long enough for such an opportunity.
The Fed, like the Bank of England, pumped up the bubble in 2005-7. The Fed, like the Bank, decided deflation was just around the corner more recently, and has now created enough money to help cause inflationary problems right round the world. The latest figures show that even the USA herself is feeling the impact of world commodity price rises, as the emerging market economies have been doing for some time. Worse still for the Fed, and for the rest of the world, the first quarter GDP figures were not great. A combination of poor growth and rising prices is not good news.
I suspect the rest of 2011will not be so bad in the USA. The tax reductions will take effect, and there will be some further boost from the various stimuli. Next year is more of a worry. This year they should worry about inflation.
US politicians are at last debating how to get their deficits down, and some States are taking strong action to do just that. National politicians are talking about it, but still deferring the bigger cuts until after the next Presidential election. They rely on the dolar’s status as the world’s reserve currency to see them through with more borrowing.
The truth is that all too many western governemnts are still borrowing too much. This makes their budget strategies risky. The West has to wean itself off so much debt, and find new ways to supply goods and services on a bigger scale that the rest of the world wants to buy. In the public sector there is still huge scope to do what needs to doing with less money spent. Public sectors in many western democracies have fallen far behind the best of the private sector when it comes to quality and efficiency.
Reining in private sector debt is more difficult. To avoid a second phase to the Credit Crunch the authorities have to set a monetary policy which avoids a further collapse of asset prices, undermining bank loans and threatening the stability of the weaker institutions. They also have to avoid printing oney which generates inflation or asset bubbles. Finding the balancing point is never easy. So far we seem to have rapid price inflation in commodity markets, and a shortage of credit for small and medium sized enterprises. It is going to take a change of approach to banking regulation and to money policy to rebalance western economies that have relied too much on borrowing and consumption, and too little on saving and investment. Tax systems could be more helpful to reinforce these messages.