How far can the totals go? Federal Reserve Chairman Ben Bernanke testified before the Senate Budget Committee on March 3, 2009. He believes that the markets will be “quite able” to absorb the debt issued by the US government over the next couple of years to cover all the bailout and stimulus payments “if there is confidence that the US will get it [the economy] under control.” When Senator Lindsey Graham (R-SC) suggested an “outer limit” at which the national debt was three times gross domestic product, Bernanke said that “it wouldn’t happen because things would break down before that.” They’ll be lending to homeowners who have higher debt ratios than that. Frankly, I’d rather lend to the US government at that ratio, and I suspect a lot of investors – both domestic and foreign – feel the same way.
On the one hand, Bernanke spoke like a “Master of the Universe” when he told the Senators that he wasn’t worried that printing all this extra money would generate future inflation. He said that when the economy begins to grow again, the Federal Reserve is “very comfortable” they will be able to deflate their bloated balance sheet. On the other hand, he did not sound like a Federal Reserve Chairman when Bernanke said “We don’t know for sure what the future will bring.” Of the two Bernankes I like the second one better: no one knows exactly what the future will bring. Why pretend that you know what the best action to take three years from now will be – or what impact it will have. I find it disconcerting, to say the least.
There are a few things we can watch for in the coming weeks and months. The President’s budget came out yesterday and will go through Congress now for approval. Don’t get too distracted by it though – virtually everything in it can change. Instead, work with what you know. The stimulus package was passed and the states are getting details now on how much and for what they can expect money from Washington. Focus on where that money is going. The best way to minimize the damage being done by the Federal Reserve’s printing presses is to be sure that money is spent in the real economy. That means roads, bridges, schools, sewer systems – and not research and development on sources of alternative fuel or studies on global warming. We are in the middle of a crisis. This is not the time to spend on wishes and dreams. If the money is spent on real infrastructure projects, it can help to mitigate the potential inflationary effects later.
The Treasury and the Federal Reserve have no choice but to keep their foot planted fully on the accelerator. Setting infrastructure in place now means we’ll get good traction later when the economy starts moving forward.