Beware The Ides Of March

Bad tidings… bad tidings my friends:

Monty Peleren of The American Thinker reports that a momentous economic decision is going to have to be made by the end of March, this year.

Ben Bernanke promised to end Quantitative Easing (the printing of money to stimulate the economy and fund the deficits) by the end of March. Some believe his commitment was a “campaign promise” to ensure his Senate reconfirmation. Others believe it was a real commitment, necessary to maintain a stable dollar. Shortly, the world will find out. Mr. Bernanke, quite unintentionally and through no fault of his own, will be Obama’s Brutus, regardless of his decision. To understand why, some numbers are necessary. Government needs funding this year of $2.0 trillion (that includes the federal budget deficit, off-budget spending, and state and local needs). Private industry needs about $0.5 trillion. Part of the funding will come from the country’s savings. Total gross savings (new savings) is estimated to be $1.5 trillion. Assuming all savings is available, a shortfall of $1.0 trillion exists
This shortfall can be met from two sources:

  • Quantitative Easing (QE)
  • Foreign lending
  • And what does that mean to the economic illiterate?

    Without QE, the government will be unable to honor its obligations. Non-payment of Social Security or Medicare or federal payroll or welfare checks or retirement checks, or military payroll, etc., etc., would show up almost immediately. That would jeopardize foreign (and domestic) purchases of additional federal debt, exacerbating the problem.

    Bernanke’s second option enables the government to continue operating irresponsibly until market forces eventually stop the profligate behavior. Market discipline would likely be imposed in the form of a collapse of the dollar or raging inflation (or both).
    Under either scenario, the Obama presidency is destroyed. Obama probably prefers the second option, because it might extend the period before sovereign bankruptcy. However, it might not extend it very much. Foreign bankers have chastised our behavior regularly. If the Fed is perceived as “The Great Enabler” rather than as protector of the currency, a run on the dollar and the dumping of Treasuries could result.

    So what do we think Benanke will do? Renege on his promise, or end QE? Is there any other way out of this?

    From Bernanke’s standpoint, it is not clear which option he might prefer, or if he even has a choice, given Congress’ involvement. If he behaves like a central banker and pulls the biggest punch bowl in history away, it would force the government to address its problems before they became more serious
    History will not look kindly on this period regardless of Bernanke’s decision. Bernanke never had a chance for a favorable legacy. If he plays his role as a central banker, history may be less unkind, stating, “He did what he had to do.” If he chooses to continue QE, it likely will judge him as “The Great Enabler,” rating him even less favorably than they did his predecessor.

    Obama loses either way. He inherited a difficult situation, but then, via foolish policies, he turned it into a terminal one. At this point, Jimmy Carter may be the happiest person in the country. His lead position in the Pantheon of Shame is in jeopardy thanks to Obama.
    For the country, times equivalent to the Great Depression are likely ahead. My guess is that Bernanke chooses (or is forced into) continuing QE. Courage is a rare and dangerous commodity in Washington. Hard decisions occur only in crisis. For the country, times equivalent to the Great Depression are likely ahead. My guess is that Bernanke chooses (or is forced into) continuing QE. Courage is a rare and dangerous commodity in Washington. Hard decisions occur only in crisis.

    If Obama’s lucky, the crash will come after the 2012 election.

    But then… he’s he’s probably too busy preparing for the election campaign to worry about such things.

    Hat tip: Verum Serum

    See Also…

    Doug Ross At Journal for more depressing economic news.

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