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Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee absolutely nothing of real value Thursday -- which was more than enough to chill the market.
Takeaway: unless economic conditions further deteriorate, no big Fed actions are forthcoming. (Or, who knows, maybe they are?) "The Federal Reserve,” Bernanke explained, “remains prepared to take action as needed to protect the U.S. financial system and the economy in the event that financial stresses escalate" -- though he later added that the European meltdown poses "significant risks" to the U.S. recovery.
Bernanke also pointed out -- probably for the benefit of all those financial journalists who think otherwise -- that “monetary policy is no panacea.”
What's somewhat surprising, though, is that while Republicans are adamant about QE3 -- a big “no” -- Democrats seem thoroughly ambivalent on the matter. Since the "stimulus" failed to achieve its self-proclaimed goals, many on the left have been advocating for a larger injections of money into the economy. The most effective way to do this, without having to deal with that pesky mercurial democratic process, is to use the Fed.
Texas Republican Rep. Kevin Brady, for instance, said, “I wish you would take QE3 off the table. I wish you would look the markets in the eye and say that the Fed has done too much.” Sen. Jim DeMint (R-S.C.) claimed that the Fed’s stimulative efforts “are giving us a false sense of security.”
To this Bernanke joked/said “a trillion there, a trillion here” won’t solve the debt crisis.
U.S. Senator Jim DeMint (R-SC) questions President Obama's Federal Reserve Chairman Ben Bernanke how increasing interest rates will affect U.S. debt payments. Bernanke stated that a 1% increase in interest rates would cause $100 billion per year increase in size of U.S. debt, or $1 trillion in new debt over 10 years. DeMint stated: "That's real money." Bernanke responded: "A trillion there, a trillion here... doesn't make that much difference."
Bernanke responded: "A trillion there, a trillion here... doesn't make that much difference."
The important question, of course, is whether a determined Bank
of Japan would be able to depreciate the yen. I am not aware of any
previous historical episode, including the periods of very low interest
rates of the 1930s, in which a central bank has been unable to devalue
its currency. Be that as it may, there are those who claim that the
BOJ is impotent to affect the exchange rate, arguing along the
following lines: Since (it is claimed) domestic monetary expansion has
been made impossible by the liquidity trap, BOJ intervention in foreign
exchange markets would amount, for all practical purposes, to a
sterilized intervention. Empirical studies have often found that
sterilized interventions cannot create sustained appreciations or
depreciations. Therefore the BOJ cannot affect the value of the yen,
except perhaps modestly and temporarily.
Suppose that the yen depreciation strategy is tried but fails to
raise aggregate demand and prices sufficiently, perhaps because at some
point Japan’s trading partners do object to further falls in the yen.
An alternative strategy, which does not rely at all on trade diversion,
is money-financed transfers to domestic households—-the real-life
equivalent of that hoary thought experiment, the “helicopter drop” of
newly printed money. I think most economists would agree that a large
enough helicopter drop must raise the price level. Suppose it did not,
so that the price level remained unchanged. Then the real wealth of
the population would grow without bound, as they are flooded with gifts
of money from the government—-another variant of the arbitrage argument
made earlier. Surely at some point the public would attempt to convert
its increased real wealth into goods and services, spending that would
increase aggregate demand and prices. Conversion of the public’s money
wealth into other assets would also be beneficial, if it raised the
prices of other assets.
Money is in this sense
special; it is not only a zero-interest liability, it is a perpetual
liability. Money-financed transfers do have a resource cost, which is
the inflation tax.