Tags: Furchtgott-Roth | Central | Banks | Economy

Furchtgott-Roth: Central Banks Can't Save Global Economy

Thursday, 26 Jul 2012 12:20 PM

Central Banks cannot save their respective economies by loosening monetary policies, said Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute, as fiscal reforms are needed now.

Federal Reserve officials have said they will stimulate the economy should it continue to veer off course, while the European Central Bank President Mario Draghi has said he will do whatever is necessary to bolster the European economy. Asian monetary policy officials have made similar gestures.

In the United States, the stimulus tool of choice has been quantitative easing, which is large-scale bond purchases from banks that pump liquidity into the system to push down interest rates to encourage capital spending and hiring.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

The ECB has taken similar liquidity-inducing measures, most recently by making low-cost credit available to banks, known as long-term refinancing operations.

While such measures jolt the economy and send stock prices rising, they also plant the seeds for inflation down the road.

Further stimulus tactics won't work, as interest rates are low enough.

Fiscal reform is in order now, according to Furchtgott-Roth, which means politicians must address politically sensitive tax-and-spending policies, which they've largely avoided up to now.

"Those who lobby the Fed to pump more high-powered dollars into the banking system (money the central bank lawfully creates) fail to recognize that borrowing costs are already at record lows, and that more liquidity is unlikely to impart more impetus to the sluggish recovery," Furchtgott-Roth wrote in a Real Clear Markets column.

"It's clear that political difficulties in Europe and in America are stifling economic growth. So, people turn to central banks, hoping that by printing money they will paper over the problems long enough for another set of politicians to exert more responsible leadership," Furchtgott-Roth added.

"But central banks are unable to help in the face of persistently flawed economic policies. Both in the United States and in Europe, we cannot rely on them for economic rescue."

In the United States, for example, the Bush-era tax cuts and other tax breaks expire at the end of the year, while automatic cuts to government spending kick in at the same time, a combination known as a "fiscal cliff" that could siphon $500 billion or more out of the economy next year alone and send the country right back into recession if left unchecked.

Lawmakers have been hesitant to touch such tax and spending issues in an election year.

"The nonpartisan Congressional Budget Office has estimated that the effects of the tax increases and automatic spending cuts — 10 percent from defense and discretionary spending — would induce a mild recession, reducing job creation by 1.25 million in 2013," Furchtgott-Roth wrote.

Politics is getting in the way of compromise.

"The logical path for Congress to take would be to extend current tax rates for another year and allow the next Congress to undertake fundamental tax reform. That would stop the economy from going into a recession now," Furchtgott-Roth wrote.

Other experts echo Furchtgott-Roth, pointing out that Fed stimulus tools won't work since they function by pushing down interest rates, which already low enough as it is.

"They repeatedly say that they have additional tools to use, but they haven’t done it," said Tim Duy, a professor of economics at the University of Oregon, according to the New York Times.

"That leads one to believe that they’re not particularly confident in the tools that they have."

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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