Here is why:

SJ and Boone call this one correctly, but miss one small point.

The issue with low interest rates is not simply that interest rates are globally too low. Certainly, for homeowners struggling as rates reset, there’s little fear that they will go out and spend a ton of money.

The problem is WHO has access to those cheap rates. And it isn’t struggling homeowners. Some – those with good credit – have been able to refinance (until just last week when rates spiked). But many who are benefiting are the banks (that are trying to earn their way out of insolvency), and highly leveraged financial players – precisely the ones who are borrowing US dollars cheaply to (effectively) short sell the US dollar by buying assets abroad that are denominated in foreign currency. (Hello Goldman Sachs)

The Fed’s dilemma is that that the discount rate and other broad instruments are so blunt. To his credit, Bernanke has been creative in launching innovative targeted credit programs (some backed by TARP funds) – and Fed policy should shift more toward those tools. (And with the public-private partnership collapsing, there’s more TARP money to back targeted Fed programs.)

Kudos to the Fed for going at deflation. But now the Fed is in effect funding capital flight from the US dollar… Ugh.

It’s reminiscent of the dollar-yen carry trade, but this time we’re on the losing side.

http://www.moneyweek.com/investments/what-is-the-carry-trade.aspx

It’s all about credibility – the ideal situation of the Fed is to print money without everyone expecting inflation. In order to achieve that, he needs Congress to send a credible signal that spending will decrease when money velocity picks back up.

Congress is not going to allow this to happen when the employment rate is 10% (and undermployment is 16%).

Inflation will happen, but the absolute worst possible scenario is to ineffectually fight inflation while the whole world anticipates it (and the anticipatory response causes disaster).

However, I will object to the characterization of this as a Keynesian experiment. It is not, because the US has an open economy. Keynesian stimulus in an open economy bleeds outward, incurring debt while stimulating other economies. Moreover, the owners of that debt cannot be taxed through traditional mechanisms, so there is a net loss of wealth (as measured by currency holdings and international debt).

I wonder what the economists at University of Chicago think of this?

In other words, what is fiscal consolidation?

And what the heck does this mean?

“ The American state is fiscally underdeveloped, given what we are trying to achieve at home and abroad. This needs to be explained clearly and repeatedly by our top leadership.”

I think this needs to be explained clearly and repeatedly to me too.

The historians plaint!

“This book highlights what happens when ‘great powers’ over extend themselves – clearly as the USA has done since the demise of communism as a force in 1991.”

I was surprised at how little that happened under Clinton. And then I was dismayed at how much it happened under Bush II.

Chris, what is your take? Do you think that Clinton over-extended? Thanks. :)

Mr. Bernanke & Geithner’s refusal to hold the Wall St. bankers accountable who made stupid investments with other people’s money, bankrupted their banks & caused this financial crisis will result in deterioration of our economy into oblivion over time. Why haven’t they (bankers, Bernanke & Geithner) at least lost their jobs & pensions? Why hold small banks, GM & Chrysler & all other companies, large & small accountable for making stupid (bad?) investments & not the Wall St. bankers? Of course Simon & James have answered this.

We know the wealthy will just move capital and jobs from the country rather than get taxed more.

The military will never get cut.

The US is headed towards sovereign default or a dramatic devaluation (in whatever form that takes). But this has already been done before. Ending the gold standard without notice was a form of default.