The world awaits the word of Ben. Will it be helicopter Ben Bernanke, commanding another drop of dollar bills on a slow growth country? Or will it be inflation fighting Ben, newly steeled for the fight by tea party poopers and the growing demand for public austerity?
I suspect this year’s Jackson Hole speech will be carefully crafted, leaving it open to interpretation from both growth hawks and inflation eagles. I will be suprised if the word from Wyoming is to print much more money immediately. Republican candidates are out and about condemning the Fed for daring just that. The Fed itself will be worried, with core inflation rising, lest they do more to stoke it. Some critics think it was Fed action with QEII which helped the spurt in commodity prices. If your money printing pushes prices up too much, it can negate the favourable impact on demand and confidence that you want from the extra cash. Nor do I expect him to dash all hopes of more bond buying round the corner. The expectation might help markets as he sees it. The administration might get quite demanding early next year if growth has stayed low or stalled.
The truth is the authorities are running out of options to keep the show on the road without sorting out the underlying problems. Some day the US does have to rein its public sector deficit – both US parties now agree in principle. The Federal deficit last year was a lively $1.3 trillion. More than one dollar in 3 spent by the national government was borrowed. The politicians are still arguing over whether to cut spending more or raise taxes more, but they know they need to do something. That’s not easy in an election year.
Some day the US – like much of the rest of the west – has to make more things for itself, or find some other way to pay for the imports from China.
These fundamental imbalances – large deficits to you and me – will not simply go away. They need fixing. Mr Bernanke can agonise over how much to print, but in the end the bigger calls will be made by the President and the Congress on how to get the US out of the red. The last lot of printing boosted markets for a bit, then they collapsed again when they saw it had not provided a permanent solution.