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| Daily Jurojin - Thursday, June 4, 2009 |
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Thursday, June 4, 2009 Bernanke's pep talk"Enough already Mr. President! You can't run a budget deficit for ever - the world won't like it. If you think the state of financial markets post-Lehman bankruptcy was wobbly, keep on cranking up the deficit and then watch the fireworks."Those are not the words of Federal Reserve chairman, Ben Bernanke during testimony on Capitol Hill on Wednesday. We're merely taking the opportunity to cut out the clap-trap and paraphrase what we think he said to President Obama's administration. The Fed chief did take the opportunity to point out that the rise in bond yields since March when the Fed announced that it might buy $300 billion of mortgage and treasury paper, might be a sign of economic health. Foreign and domestic investors are now ditching bonds partly because they don't face the same wobbly financial market, but as Mr. Bernanke explained it's probably got a whole lot to do with the spiraling debt mountain the present administration finds itself buried under. The 2008 budget deficit was seemingly large at around $450 billion, but pales into insignificance against the projection by the non-partisan Congressional Budget Office, which estimates the 2009 shortfall will be $1.85 trillion. That stacks up to 13% of GDP and has been exacerbated by an $800 billion fiscal stimulus, a bailout of the financial sector and the nationalization of Fannie and Freddie, the public housing giants along with growing unemployment insurance checks. On Wednesday the private-payroll processor, ADP forewarned of a rise in Friday's official unemployment statistics, noting ongoing private sector job losses according to companies it deals with. The 532,000 job losses it recorded were not only worse then predicted but accompanied by a nasty revision to April's data. Mr. Bernanke in describing the green shoots of recovery was pretty cautious in noting that the economy was in danger of slipping back into the mire if financial conditions didn't continue to improve. What's interesting here is that several global central bankers have been less rosy in their observations about the outlook than investors have been. And Mr. Bernanke was no exception when he said he still expects "sizable" job losses to mount. Mr. Bernanke seems to realize that coordinated central bank spending has put a band aid on a flesh wound. The problem remains one of confidence: If consumers don't continue to respond, if the housing market doesn't remain stable thanks to thawing credit markets, gangrene is almost assured to set in as the credit crunch takes a violent lurch in the wrong direction. For now the chairman has to be thankful of small mercies and one of these is the likely stable path of low inflation over time. We're not altogether sure that plenty of spare capacity is the way Mr. Bernanke aimed to achieve price stability when he was handed the reins two years ago, but that's what he feels he's got. That was one positive for fixed income investors as they bought back into bonds. But on the other hand, such spare capacity might come back to bite President Obama and his prediction for a 2011 budget deficit of $1.25 trillion or a projection that the deficit might halve before the end of his four-year term. Private economists project slower growth and the associated rising costs of such weakness might hinder the President's ambitions. For now Mr. Bernanke has to be happy with the signs of stability that the market affords him. The housing market, the bond market, the equity market and the dollar have all regrouped to deliver a sense of calm, for now at least. While the elevator music is playing, officials can plan on what action to take when the slowdown in the contraction stops. We'll have to wait to find out whether that means a return to expansion or something more sinister for 2010. The Supreme Council of the Secret Order of Jurojin |
