What Will Bernanke Do?

What can he do? There is a lot of pressure for Bernanke to announce QE3. Most of that is coming from Wall Street which saw increases to the value of the stock market of 70% (QE1) and 30% (QE2). The resultant devaluation of the dollar thoroughly aggravated the Chinese who (rightly) see quantitative easing as the exporting of our unemployment problem, i.e., by devaluing the dollar we make our exports more attractive in foreign markets. You say, "That's a good thing."? Not so fast, pilgrim.

We run the very real risk of starting a vicarious trade war where we devalue our respective currencies in a downward spiral where in the last century we might have raised tariffs.

What arrows are in Bernanke's quiver? They're pretty limited historically. He's already signaled his willingness to hold interest rates to near record levels through 2013 in the desperate hope that will save Obama. If something doesn't shake out before the end of September he may be forced to over-ride the Free Open Market Committee and institute QE3. If that doesn't work (and it most likely will not) he will feel increasing pressure to do something new and daring like artificially inflating the currency to devalue the debt. How do you think China will react to this? See what I mean? If the Fed lets inflation run rampant (or loosely controls it) at a rate of say 100% the value of our $14 trillion debt becomes $7 trillion. Nice accounting trick that...

Fortune Magazine says that three things have to transpire in order to keep us from a double-dip recession: 1) the Europeans have to resolve their debt crisis. The Europeans are more dysfunctional that the U.S. Congress. Churchill said that the..."Americans always do the right thing- after they have exhausted all the alternatives..." Thus far, the Europeans always do the right thing a year after it might have been effective. Pity the poor Eastern Europeans. Vaclav Klaus, president and twice prime minister of the former Czechoslovakia, says they escaped the clutches of the Union of Soviet Socialist Republics only to fall victim to the socialist European Union; 2) an end to the housing bust , and 3) a significant increase in demand. Fixing the nation's bridges, airports, and building high-speed rail will accomplish none of those things. Did I just reveal Obama's jobs plan? No, he did over the course of the last two-and-a-half years. And it's all subject to Davis-Bacon... And everything old is new again.