Stephanie Pomboy on Ben Bernanke
Posted by Steve Markowitz on June 1, 2014
Well-known economist, Stephanie Pomboy, made a presentation at the Wine County Conference 2014 posted below. Pomboy reviews a series of charts that demonstrate the failure of Ben Bernanke’s easy money policies.
During the 2009 economic meltdown, the federal government and Fed used the crisis as a pretense for massive interventions. In the early months this included TARP, which bailed out banks that were at financial risk because of their own imprudent behavior. After the election Barack Obama and the Congress passed the massive Stimulus Program. While it is not possible to determine if these programs protected the economy from Armageddon, given the anemic recovery, the slowest since the Great Depression, it is evident that they did not aid long-term economic growth.
Ms. Pomboy specifically takes on the failed Fed easy money programs, mainly Quantitative Easing (QE) that in essence is printing money. The Fed purchased Treasury Bonds in an effort to keep interest rates artificially low under the theory that this helps stimulates economic growth. The slow recovery is one indicator that this effort’s benefit has been marginal.
Easy money policies typically lead to inflation. To date, however, QE has not generated broad-based inflation likely due to the competitive nature of globalization, excess production capacity and depressed demand. However, certain assets significantly inflated including energy, certain foods, and equities. One consequence has been the growing inequity between high net worth individuals and the greater population. Not only are wealthier individuals less impacted by food and energy cost increases, but they benefited more from the increases in equity values. In addition, as food prices increase, the poor in less developed countries go hungry. Some theorize that the Arab Spring was propelled more by hungry people than those seeking political reform.
Ms. Pomboy refers to a various charts that indicate some of the negative impacts to the economy resulting from Ben Bernanke’s (Fed’s) QE policies. One charts posted shows the benefit large corporations have obtained from artificially low interest rates. This has increased profits that further propelling equities’ valuations. That benefit has flattened more recently and will inhibit these gains and possibly equity values going forward.
Also plotted are corporate profits as a percentage of GDP. This has reached new heights that are unsustainable. The two previous periods that this ratio peaked was before the Dotcom meltdown in 1999 and before the stock market crash of 2008.
Perhaps the most significant chart presented by Pomboy is the one showing the source of funds from which the U.S. Treasury borrows to fund our deficits. Since Quantitative Easing started, the willingness of other countries to buy America’s debt has dropped significantly. This trend is unlikely to change with the artificially low interest rates being paid on US Treasuries. There are two likely outcomes to this trend. Either: 1) the United States will have to pay significantly higher interest rates on future borrowings that will force the government to significantly cut spending, or 2) the Fed will have to increase QE to fund the country’s deficits. The second outcome, which Ms. Pomboy predicts, will create significant inflation and place at risk the US dollar’s unique position as the world trading currency. The ramifications of this latter item are quite destabilizing for the American economy.
Ms. Pomboy theorizes, somewhat sarcastically, that Ben Bernanke retired from the Federal Reserve because of his understanding of the dilemma resulting from foreign buyers losing their appetite for US treasuries. Printing money is voodoo economics that has been tried in the past by failed economic models. It is never resolved a country’s long-term problems. The question is not whether there will be consequences, only what they will be.