Ferguson: Overwhelming US Crisis Looms

Money News ^ | 07/26/10 | Julie Crawshaw

[Pelham]

The problem is that there are so many mixed signals coming from the economic data right now that you can make a case for contradictory outcomes. This isn’t a normal cyclical economic downturn, it’s a structural downturn and it isn’t going to respond like a cyclical event. The damage to the banking system is substantial.

Inflationists look at the Fed’s quantitative easing and its ultra low interest rates and they see inflation coming. Deflationists look at the massive amount of bad debt in the banking system with more on the way and they see deflationary forces overwhelming the Fed’s attempts to reflate the banking system.

Bulls look at increased traffic and some strength in commodity prices and they see a new bull market starting. Market bears look at the data and see a sucker’s rally that will fail because of serious problems with the consumer.

[Pelham]

That wasn’t the author’s own conclusion. She was quoting two economists with different views.

[Pelham]

“O’Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. “You know, Paul, Reagan proved deficits don’t matter,” he said, according to excerpts.”

If Cheney actually said that then he is a fool who has no real knowledge of Reagan’s economic program. Neither Reagan nor his economic team ever took such a cavalier attitude towards deficits. ERTA in 1981 included spending cuts to balance the tax cuts, but Speaker Tip O’Neill reneged on the deal. The resulting deficits prompted Reagan to sign the 1982 TEFRA tax increase in order to reduce the growing tax shortfall. In his farewell address Reagan mentioned if he had any regrets upon leaving office, and the first thing he brought up was the deficit.

An indifference to deficits is a hallmark of Keynesian politicos, although in fairness to Keynes himself he had enough sense to only advocate them in recessions. Cheney and Dubya ran them during boom times, and judging from Cheney’s statement they did it without regret. Whatever lesson they think they learned from Reagan wasn’t one that he was teaching.