The good news? The Fed is passing out more heroin in the form of cheap money. It’s going to be buying $40 billion of mortgages a month, hoping to keep interest rates down and boost house prices. Since the ECB is taking the same approach to sovereign debt in Europe, nobody’s going into withdrawal anytime soon. No chills, no spasms, no bone deep screaming pain.
That’s a good thing and we can all be relieved, sort of, that the world economy isn’t going to collapse before Christmas.
But there’s more bad news than good, so the relief is short term and the long term worries rise. What’s not to like?
First, the fact that we need the help. That means that four years after the panic of 2008 the U.S. economy is not yet securely on track for a self-sustaining recovery (and Europe is in much worse shape). When the doctor says you need another operation, it means the first operation didn’t work. The Obama stimulus didn’t work; you can argue about who is responsible, but the basic argument is over why we failed, and there is no getting away from it.
Second, monetary stimulus on this scale really is a little bit like a powerful, mind-altering drug. You get a high going up, but coming down hurts—and over time it takes more of the drug to get the same result. The economy’s response to both fiscal and monetary stimulus looks a bit flabby these days—it seems to take a bigger jolt to get the same response.
That’s not good; you can make an argument that the declining ability of stimulus to move the needle is a sign that inefficiencies are beginning to accumulate and that the economy has some deeper issues that conventional policy measures aren’t reaching.
Third, while there’s not a lot of inflation out there now (unless you look at energy, food, health care, education and gold—and who needs any of that stuff?), the risk that down the road some nasty turn of the screw could set off 1970s-style inflation is real. And with every round of stimulus those risks grow—unquantifiably, but they grow.
In the old days central banks were the tough guys: the job of the Fed chairman was sometimes defined as taking away the punch bowl just as the party was really getting going. These days the Fed spends most of its time trying to figure out how to get everyone to drink more intoxicating punch out of bigger cups.
We’re glad the market isn’t going to crash right away. We hope that a recovering economy will allow the Fed and its fellow central banks to stop pressing the accelerator to the floor. And in the long term we think that technological developments are laying the foundation for the greatest and most transformative global boom anybody’s ever seen. But there’s no way around it: the economy’s need for yet another round of stimulus is a red flag, not a green light.