‘We can’t inflate our way to prosperity’

By Chrystia Freeland
October 12, 2010

“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

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She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Their conversation then turned to China. Both agree that the increasingly fiery rhetoric Washington directs toward Beijing is counterproductive and that the U.S. is better served by enacting policies to reduce its trade deficit:

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HUBBARD: If [the U.S. and China] both keep beating up on each other and try to beggar our neighbor, we’ll get into a very bad place. China does have a protectionist policy. It does have a mercantilist policy. And I think focusing on those things quietly rather than from the hilltops, as the administration is doing, would be the right answer.

TYSON: [the rhetoric towards China is] a mistake for them and it’s a mistake for us. … but I honestly think that, just like Glenn does, the exchange rate is not the issue here … frankly, I think we’ve seen much more of a sign that the Chinese are rebalancing and restructuring than we’ve seen in the United States so far. [...]

HUBBARD: [If you focus] on export led growth, you’re guaranteeing, at some point, to have a large financial crisis, because you’re building up a lot of negative net present value projects in China.

As for a second fiscal stimulus, Tyson said the U.S. should spend $1 trillion on infrastructure over the next five years. She thinks direct aid to states should be a priority at a time when 25% of the nation’s children live in poverty and state and local governments are forced to lay off 88,000 teachers because of budget shortfalls.

Surprisingly, Hubbard conceded that a second stimulus would be helpful, but said it should only take the form of investment incentives and a mass refinancing of mortgages held by Fannie Mae and Freddie Mac. While infrastructure spending could be stimulative, he says shovel-ready projects are few and far between.

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Posted by Peter Rudegeair

8 comments

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What rubbish. America owes far too much money to the rest of world to risk a buyers strike of its debt. In yet another example of the Obama regime’s stunning incompetence, treasury debt has been piled up sky-high with little, if anything, to show for it. And please, if there WAS anything to show for it, we wouldn’t be wasting our time having these silly discussions about QE2 and whatnot, because the economy would be going great guns as was promised by Team Obama, and it clearly ain’t. QED

Left unsaid in all these discussions of the Fed, with only a grudging nod to the rest of the world, is the destructive role played by fiscal policy out of Washington. Bank-bashing may please the hard-core union vote; medicare may please the ‘progressives’ and their ilk; but out in the real world, nations have to pay their way or risk bankruptcy. Uncle Sam default? It’s happened before.

Creditors will smell debt-monetization long before it happens, and all this fine talk about twenty basis point declines in real rates will be just so much static when long rates get into double digits. Don’t think it can happen to America? Tell Mr. Obama to be mindful of the rest of the world for a change, and stop taking so much for granted. Better yet, clip his wings sooner rather than later.

Posted by Gotthardbahn | Report as abusive

I don’t blame these people for their thought process. They believe that weakening currency (Stimulating/ QE) will solve all their problems. They think they are right. In today’s world of “Easy way out” this philosophy is obvious. Issue however is what happens if currency depriciation goes more or far more than expected. As then. Appriciating currency back is tough and that can take generation of hard work.

Posted by Amaresh_Gangal | Report as abusive

I have developed blog to discuss this and such issues. you may find predictions on . http://amareshgangal.blogspot.com/p/top- predictions.html

Posted by Amaresh_Gangal | Report as abusive

I’m confused…the Fed is not part of Team Obama. Nobody wants to add debt if you don’t have to, but with the economy failing, are their any other alternatives? Would imposing austerity measures to tame the debt somehow help the economy? States that have begun enforcing austerity measures are seeing the edge of the double dip recession.

Unfortunately, we can’t have the proverbial cake and eat it too. Eventually the waiter will bring the bill. If we skip the cake, we may not have a restaurant to go to once we decide to grab a slice…

Posted by Mike_s1 | Report as abusive

The levee constructed by banks has burst, and we are up to our eyeballs in toxic sludge, much like Hungary in the literal sense. Everyone is screaming at Bernanke to pull the switch and unleash a torrent of currency to wash it all away. Bernanke stares off into the distance and his hand trembles as it passes over the lever. “Well what are you waiting for?” impatiently exclaims President Obama. We’ve reached the season finale, folks. After a commercial break, a sneak preview about what happens on the next season of Dynasty… and we’re all dying to know the outcome.

Posted by DisgustedReader | Report as abusive

Shares must have become cheaper when the economy develops. This is not happening. Why?

Posted by underwolf | Report as abusive

I wonder at what point we would start engaging in hyperinflation. Remember the Republic of Weimar?

See for yourselves:
http://brainmindinst.blogspot.com/2008/1 2/reichsmark-fiscus-exuberance.html

Posted by PeterMelzer | Report as abusive

I’m afraid that as predicted, the great experiment of democracy is about to come to an end. Politicians have found they can get re-elected easily by spending money they have confiscated from hard working taxpayers on programs and entitlements. Unfortunately, our founders did not consider that representation without taxation might be as bad as taxation without representation. We have come to the point that the non taxpaying voters outnumber the taxpayers, and they are voting themselves ever more entitlements with the help of our politicians!

Posted by zotdoc | Report as abusive