Trumponomics : The Bernanke fiscal bomb
The world financial market got to an awful start in the summers of 2008 with the collapse of likes of Lehman Brother and Bear Stearns. The major cause for the collapse of US Stock market can be attributed to the low interest rates, policies of Alan Greenspan and Larry summer’s calls for deregulation of a Glass stealing act which created the much needed stock as well as the housing bubble in the US. The impacts of the collapse of the US Stock market were felt across the world financial market touching even the shores of East Asian countries like Singapore and Hong Kong affects billions of lives across the continents. Sooner the major Central bankers were involved in the biggest rescue mission of financial market after the “The GREAT DEPRESSION” in 1929 .
Ben Bernanke, who was appointed as chairman of the Board of Governors of the Federal Reserve System on Feb 1, 2006 by Bush Administration, replacing Alan Greenspan. His appointment was mainly due to his work on the Great Depression which is written in a book called as “ Essays of the Great Depression “, which contains much of the research on which he built his academic reputation . As Federal Reserve chairman Bernanke was responsible for guiding monetary policy in the U.S economy. He created many fed tools to suppress the global recession like lowering the interest rate, operation twist, forward guidance. He is deeply found of easy money and his theory proponents were based on idea that the “ The GREAT DEPRESSION”, were byproducts of liquidity crisis. The only way to come out of such financial crisis is to provide much needed liquidity to the banks and in the market. QUANTITATIVE EASING” was the one byproduct of such thinking which was going on in Japan from past 20 years. The run on the Banks were solved with such monetary policies.
“Quantitative Easing “ is a monetary term which defines massive currency printing by the Central Banks to avoid a deflationary crisis in the short term. Those currencies never go to individual hands, but soak up to the bank balance sheet as form of excess reserves. Bernanke was reluctant to take US out of recession and he can use any monetary means in order to boost the US Economy. Since 2008 to his tenure end, Bernanke were involved in massive currency printing in the form of QE1 ,QE2, QE3 with currency worth 3.8 trillion dollars were printed in more than a span of three years. That easy money did not surge any real demand demand in the economy, but on the contrary get soaked up in the already popped up US Stock as well as the housing market . The results were the creation of biggest stocks bubble in the US history since the great depression. The idea to inflate the currency in order to avoid the deflationary crisis was valid up to a reason.
The byproduct of such massive “Quantitative Easing” programs were not only affected the US market, but across the world in the form of food inflation and led to massive political upheaval in form of the Arab spring in the middle east and regions across the Africa. The adversaries of the “QE” policy were not only the middle class, but all spectra of the society. The cycles of boom and bust follows a certain trend, but Bernanke reluctance to use any monetary policies to counter the cycle of bust irrespective of the consequences has open a Pandora box in the history of monetary policy. Massive amount of QE’s was unleashed in the market over the years to put the inflation in chart so does the growth afterwards. One of the key proponents of the debt based growth model is that growth is proportional to inflation. Bernanke was targeting inflation so that it can avoid the deflationary crisis, which is hovering over the US Economy after the 2008 crisis. “Quantitative easing” was the right medicine at the wrong time.
The key to the growth is innovation/ technology improvements and social needs and demands rather than financial engineering. Financial engineering in the form of monetary policy tool measures such as Quantitative Easing or zero interest rate policy or negative interest rate policy can be good to boost growth in the short term but in the longer term it will have adverse consequences on the macroeconomic stability and people at large.
The fiscal illusionary Growth Dream
“When you get something for free, it’s hard to resist ‘’
Despite taking all the monetary measures taken in eight years, Bernanke could not able to get the target 2% inflation. Bernanke is the world leading economic expert and his words swayed the stock market and the value of the major currencies. With fiscal and monetary policy reaching to their limits, the search for new solutions to the world’s low-growth, low inflation has turned Bernanke to “ helicopter money “ A few months back Ben Bernanke was in Asian wall street Tokyo to pursue their government to follow his second major monetary experiments in the list i.e. “Helicopter Money “ in order to boost the global growth.
The normal system allows governments to lend money from Central banks in the form of bonds or securities as it depends upon the need and state of the economy. But in case of “Helicopter Money” the government himself acts as a central bank and prints as much money as it takes to boost the growth. “Helicopter Money” can give politicians an unlimited access to monetary means thus making a strong case for political abuse in the name of fiscal policy measure.
As America and the world at large are curious about the new president elect Trump and his economic policy. A little insight to his statements during the campaign will give us a clear understanding about “ Trumponomics “ . During the campaign, President Trump threatened the US Federal Reserve’s independence and heaped criticism on Fed chair Janet Yellen. Trump hawkish behavior shows that he longer will allow the American economy to be solely dependent on monetary policy for growth. Trump’s proposed loose fiscal policy of $1 trillion dollar of massive infrastructure spending as well as big defense spending is in synchronization with those view on what he doctrine in name of Trumponomics.
One of the key problems with such fiscal policy measure is that it questions the very idea of existence of fiat money and its values in ordinary person’s mind. It also transfers the substantial amount of wealth from the poor and middle class to rich. America total debt now stands at $64 trillion which is equal to a staggering level of 350 % of their GDP. What crushing American growth story are not demand, but too much easy money and debt.
Helicopter money will help the achieve the growth target of developed economies like US in the short term but in the longer term the consequences will be unimaginable. The endgame of “helicopter money” will result in hyper-inflation as we are seeing it in the case of Zimbabwe and Venezuela with the inflation touching 1500% and 2000% of the previous levels. Its only bullet left in the cannon of the central bankers, but the most dangerous one’s and it might lead to end of centralized economy and opens the doors for the free market as well as the establishment of a new international monetary system. The only question confronts president Trump is he willing to take such gamble with vis –a-vis to Dollar as a Reserve currency.