Ben Bernanke, the Chairman of the Board of Governors of the Federal Reserve System of the United States, must be feeling a bit frustrated by now.
As soon as he observes a set of consistent signals that the American economy is strengthening, he’ll likely opt to restore interest rates to higher (i.e. relatively normal) historical levels. On the other hand, as soon as he observes a set of consistent indicators that the economy is weakening, he’ll probably opt to move even more aggressively to stimulate the financial markets.
But what will he do if he doesn’t observe any consistent signals at all? In other words, what if he continues to take note of signals that contradict each other?
That’s what happened to Ben last week, when mixed signals about American consumers were released to the financial markets. Good news was embedded in bad tidings, and bad news in good tidings as well.
It’s Good News, Or Is It?
What good news cheered the markets? It was the report that American household debt levels had climbed for the first time since the pre-crash days of early 2008. Although excessive debt is undoubtedly a worrisome situation, many financial pundits interpreted the increase as a sign that consumers are feeling more secure about their jobs and their futures.
On the other hand, some noteworthy concerns were embedded in this good news. Apparently, the increase was largely attributable to surges in student tuition and automobile loans. Although automobile purchases undoubtedly stimulate economic growth, student indebtedness has been “in the news” lately because of its debilitating effect on the work force.
In other words, the news about debt was generally good, and yet one of its underlying causes was cause for worry. That’s the type of “good news, bad news” data that tends to drive federal regulators up a wall.
It’s Bad News, Or Perhaps Not?
Meanwhile, the markets received some unabashedly bad news too. The median annual household income in the United States has fallen to its lowest level since 1995. In other words, a full thirteen years of economic progress in the late 1990s and early 2000s have been fully reversed by the past four years of deep recession and the ensuing tepid recovery.
Furthermore, even though economists claim that the recession of 2008 and 2009 ended some time ago, annual household income has fallen each year for the past four years. Although the national economy has begun to grow again, consumer wealth has continued to slide significantly.
What good news can be gleaned from this depressing statistic? Interestingly, both the Democrats and the Republicans appear to have found a political “talking point” in the data. The Republicans claim that the recent slide in household income can be blamed on President Obama’s economic stewardship. And the Democrats counter that the recession actually began during George W. Bush’s term in office, and that his eight years of service failed to generate any permanent wealth for American consumers.
Quantitative Easing, The Third Generation
These mixed signals have persuaded Ben Bernanke to announce additional actions to stimulate the economy, but to implement them at a scale that is unlikely to trigger massive growth. Skeptics like Nobel Prize economist Paul Krugman have noted that unlike President Teddy Roosevelt, who advocated that the American government should “speak softly but carry a large stick,” Chairman Bernanke appears to be adhering to the reverse strategy.
On the one hand, he has vowed to prioritize economic growth and the employment of American workers as highly as the goal of monetary stability. That’s a major step in a new direction for a government bank that has long focused primarily on maintaining the value of the American currency.
In fact, the Chairman has pledged to maintain low interest rates for the foreseeable future in order to encourage lending and investment activities. And he has expressing his intention to engage in a third round of quantitative easing, a technical term that refers to the injection of federal funds into the financial system through the purchasing of debt securities.
Nevertheless, many pundits have noted that such actions may only affect the American economy to a limited extent. More drastic actions, such as the large scale nationalization of all of America’s global banks, were once debated but are no longer under serious consideration in the United States.
Although the American equity markets continue to demonstrate significant strength, most economists predict that the United States will continue to muddle through its financial quagmire. With Europe remaining in a banking crisis and Asia troubled with slowing growth and territorial disputes, it is difficult to anticipate any external positive surprises that may jolt the American economy towards renewed prosperity.
Chairman Bernanke might thus be advised to acclimate himself to the current condition of mixed signals. Although “one step forward and one step back” might be a frustrating sequence for any one who wishes to make definitive progress, the American economy appears to be stuck in that very rut for the present and the immediate future.