Monday, December 22, 2008

USA Economic Policy – A High Wire Act

It is said that what Fed Chief Ben Bernanke and USA Treasury are facing, they do not have much parallel in economic history. This much is accepted by everyone that even though each recession is different; the scale, the depth, causes and long term impacts of the ongoing recession are far different. It is not the usual business down turn brought by over supply of one particular industry. Granted that home building industry in USA over supplied; but the real reason is mess in credit / financial market.

So in that sense there are only two effective historical incidents comparable to teach USA something meaningful here – one the Great Depression and the other is the ‘lost decade’ of Japan. Of that, the Great Depression was before world economies went completely towards Fed Printing Press as the sole value generator behind the currency instead of Gold. That leaves Japanese experience as the only comparable experience to learn something useful.

In this regard Northern Trust has put forward a fantastic primer. Thanks to Paul Kedrosky of RealMoney; I came across this article and it is worth anyone’s time who wants to know validity of Fed Chief Ben’s efforts. May be I have been wrong in being critical of Feb Chief. It is true that he has been lately loosening up interest rates and monetary policy. JJ Cramer says he is lately rising to the occasion and embarking upon aggressive policy. We will see whether America will go burst or will succeed in addressing these current economic challenges. But for sure no one will criticize Fed and American Policy makers for not being bold. In that sense, what is going on is really once in century kind of economic policy experimentation and result of that will determine whether ‘printing press backed currency / fiat currency’ is a valid policy or not. Otherwise many Cassandra’s are waiting to turn the economic wheel backwards to ‘gold standards’. May be Ben Bernanke and USA policy makers are realizing that this is the fight for existence of Fed and Dollar as it exists.

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