When interest rates rise, QE3. That's all Bernacke has in his tool box. And it will keep folks happy for awhile longer. But it all has to end at some point. And it will end badly.
Monetary policy is ineffective after some point. (I am unspecific as we don't know where that point is.) That is why we ended up with the stagflation of the '70's. As the current Federal Reserve board members don't wish to be remembered like that, I am willing to bet they are very wary of any more monetary stimulus.
So, what does the end game look like? Japanese stagnation, or explosive inflation, or what?
So long as the Fed controls monetary policy, explosive inflation is unlikely. (If Obama decides to mint those trillion dollar coins that some leftist idiots suggested, that will change.)
Japanese stagnation only works so long as our government can keep borrowing. Japan has been prevented from collapse by the very high savings rate of the Japanese people. (A luxury the US government doesn't have.)
My bet is sudden collapse. Countries can keep borrowing until suddenly they can't. It's never a slow process, it's a cascade. There are a few warning signs beforehand (like threats of credit downgrades...) but our politicians seem incapable of comprehending the warning signs. I just hope the collapse holds off until the next president (and congress) has a chance to ACTUALLY respond. I don't know if they will, but if Obama wins in 2012, collapse is certain.
How can I say this? CBO is currently predicting that we will be adding $3.5 TRILLION to the debt by 2016, under current baseline. (That is, after the passage of the debt ceiling "cuts"). We are projected to lower real deficits to $500 billion by 2014, but begin increasing actual deficits afterwards. These deficits are assumed to be smaller, percentage of GDP-wise, because growth is assumed. The current revisions of Q1 growth downward have already cost several hundred billion in "assumed" growth. (Compounding makes it very bad.)
IF we don't get a new president and congress that will kill the government-caused uncertainty in the economy (Obamacare, EPA run amuck, Dodd-Frank, NLRB, etc...), we will not grow anywhere near necessary JUST to meet the baseline. EVEN if we do meet the baseline (which I doubt), our debt will grow to $17 TRILLION by 2016.
If we continue our present anemic growth of ~1%, GDP will be 15.2 TRILLION in 2016 (CBO projects a GDP of $19.3 TRILLION). 17 TRILLION is 112% of 15.2 TRILLION.
However, if we don't grow, (or worse, drop into another recession that even Larry Summers says has a 1 in 3 chance of happening) our baseline is screwed and we will be borrowing more. Again, the recent revision of Q1 growth to .4% cost the baseline assumptions hundreds of billions of dollars in 2016. (Compounding really hurts.)
So 112% of GDP is a rosy scenario...
This is why I say I can't vote for another RINO. Another go-along-to-get-along milquetoast moderate doesn't solve the problem. We can no longer just mitigate the damage,
it must be repaired.I'm getting to the point where if the Republicans nominate a Romney or a Huntsman, I'll actively vote FOR Obama.