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Bernanke optimistic that stagnation will continue
Howard Richman, 6/8/2010

According to third hand reports of a late June 7 interview, Chairman of the Federal Reserve Ben Bernanke is optimistic that the current high unemployment economic stagnation will continue (i.e., that the U.S. economy will not slip back into a recession):

"My best guess is we'll have a continued recovery [but] it won't feel terrific," he said....

Bernanke quickly noted that there were "caveats" to this forecast. Growth was still not fast enough to bring down the high unemployment rate.

The basis of his optimism is his wishful thinking that consumer spending and business investment will continue to rise, because they now have momentum.

But for consumer spending to continue its momentum, consumers will have to continue to spend an ever greater proportion of their income. They can be encouraged to do so when the stock market is rising or when their house prices are rising, but both appear to be falling at the moment.

And for business spending to continue its momentum, businesses have to be convinced that new investments will be profitable. But with the dollar rising vs. the euro, manufacturers will wonder whether it is wise to invest in anything that competes against European products in U.S. or international markets.

Bernanke is currently against any attempt to rein in the Federal budget deficits during the next two years. He wants to see fiscal responsibility begin in the "middle term" which he defines as between 3 and 5 years from now. He is hopeful that the current economic stagnation will continue, if we just stay the current course which is heading the U.S. government toward a default on its debt.

Stagnation (another name for "depression") is indeed better than recession. During a depression, the economy stagnates with high unemployment. During a recession, the economy sheds jobs.

But there is an alternative to economic stagnation being our hoped-for outcome. We could get prosperity by requiring balanced trade, which would stimulate the economy while bringing in government revenue from either tariffs or from import certificates auctions. As I have pointed out, such action would be in accordance with a special WTO rule for trade-deficit countries.

Bernanke probably thinks that he is now putting into effect Keynes' policy recommendations. But unlike Bernanke, Keynes was not a free-trade ideologue. Keynes rejected the classical economists' idea that unilateral free trade is a good policy.

Keynes advocated that trade deficit countries balance trade. Doing so would quickly get both Europe and the United States out of the persistent depression that eventually comes, as Keynes predicted, when trade-deficit countries let their trading partners practice mercantilism.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]