According to the author of the article, there is nothing central banks can do to stop the weakness in the financial system from coming. The central banks can continue to print money in order to help protect the economy, but this will still not stop the growing weakness in the financial system.
By Thomas H. Kee Jr.
Aug. 1, 2012, 9:21 a.m. EDT
Market Watch
There is nothing they can do to stop the weakness from coming. They can mask it any way they want, and they should try their best to protect the economy, but the central banks of the world are walking a tight rope, and any slip could spell disaster.
Global economies aren't on sound footing, yet by economic- and market-related numbers, the United States is seemingly fairing well.
But the U.S. hasn't even begun to engage prudent fiscal policies.
Other countries have made the tough decisions, though not by choice. Europe is the best example. And had Germany not been so demanding, we could probably bet that the can would have been kicked down the road there, as well.
There was a clear limit to the bad policies and bad decisions, however, and when that reached a head, austerity measures kicked in.
Here in the U.S., that hasn't yet happened, and although the law says it will begin at the end of the year, something tells me they will try to prevent it because our economy cannot take it. I admit that as well, but eventually they will need to tackle this problem; otherwise, it will come to a head just like it has in Europe, and that can make this situation much worse than it otherwise would have been.
The U.S. can kick the can — we can also print more money — but nothing will stop the weakness from coming. My longer term macroeconomic work, “The Investment Rate”, proves that this period of natural economic weakness lasts until 2023, so they will need to print and engage QE programs coined, not only as QE3, but maybe up to QE23!
In order to stave off the problems that exist today, they will need to print for 11 more years, but even if they print, it won't make the economy strong.
The trillions that were infused into the economy in recent years did nothing to spur growth, but it did offer stability and prevent a meltdown, so it served its purpose. Any stimulus from here will also likely pad the underlying weakness that exists today, but it cannot prevent it.
Unfortunately as well, Wall Street is very short sighted, and if new stimulus packages come the vision will turn from what has been done to what will be done next, and this cycle will continue until one day we actually pay the piper. This is troubling because the spending cuts and tax hikes scheduled for the end of the year — measures that would not even come close to balancing the budget — would equate to the loss of about 1 million jobs. That is an economic headwind if I ever saw one.
Reasonably, our economy cannot take it, but because the natural state of weakness lasts until 2023, they will have to do this at some point. If they don't take prudent measures themselves, and if the U.S. fails to prudently manage its debt, eventually the market will do it for us. And that would be much worse than the alternative.
Imagine a scenario where U.S. Treasury bonds began to fall out of favor because the U.S. became to be considered unwilling or incapable of making prudent fiscal decisions.
Maybe the Fed could keep buying U.S. bonds forever and keep yields low that way, but even that won't sit well with investors. I have imagined every scenario I could think of, and nothing is good, but some are less bad than others. Although it is the toughest decision to make, and it will probably be political suicide for many of our leaders (who can't agree anyway), I think we need to start being responsible today, not tomorrow.
If we become responsible now, we can manage a slower growing economy, but we first need to accept that it is going to grow at a slower pace. We cannot expect the growth rates of the early 2000s because it just isn't going to be there. This opens an entirely new can of worms though, because if growth is significantly reduced, should P/E multiples remain the same?
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