Economist and author Thomas Sowell believes that the Federal Reserve could well end up trapped in an endless cycle of printing money to prop up the U.S. economy.
Sowell is currently the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution at Stanford University. Sowell’s book "Basic Economics" has been translated into six languages and is now in its fourth edition.
The latest round of so-called quantitative easing — money printing by the Fed to buy up U.S. debt and keep interest rates low — is likely to continue, Sowell tells Newsmax.TV.
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“Once you buy the argument that this kind of stuff is what you need to get the economy out of a recession and you try it and it doesn’t work, politically, you can’t say, 'I was a fool, let’s stop doing this,'” Sowell said.
“You have got to press on, doing more and saying, ‘We didn’t do it enough.’ Somewhere down the road, the next generation may be seeing QE20 or QE30,” he said.
The resulting flood of dollars into the U.S. money supply has created inflationary pressures worldwide, particularly for prices of energy and food but also commodities like gold and copper. Copper just set a new trading record in London and oil experts now see oil quickly surpassing $100 a barrel, a trend Sowell believes will be hard to contain, considering real demand.
“When you have two largest nations on earth in terms of population, India and China, growing at a very rapid rate, the demand for petroleum is huge. Even though the inventories may be large, absolutely, apparently the market doesn’t think they are large relative to the growing demand for petroleum,” Sowell said.
Until supply grows, don’t expect oil to come down soon, Sowell warned.
“I wouldn’t bet on it. We’re still restricting the development of our own oil. We’re restricting exploration in the gulf of Mexico, (Alaska’s) ANWAR and so forth,” he said.
As for the secondary effects of Fed easing, Sowell doesn’t believe that a decline in the value of the dollar will translate into much advantage for the United States.
Financial observers have been warning for months of the risk of competitive devaluations as major economies seek to support job growth by destroying their own currencies. Chinese President Hu Jintao kicked off his current U.S. visit by proclaiming the dollar a relic and promoting the yuan to replace it.
Even if the dollar continues its historic slide, don’t count on earning an advantage from that, Sowell warned.
“People are talking about how our exports are getting better. The import-export balance is grossly overrated,” Sowell said.
“The United States had an export surplus every year of the Great Depression of the 1930s, yet that doesn’t seem to do a lot for the economy,” he said.
As for alternatives to currency, Sowell cautions that predicting the direction of precious metals like gold “has really not been reduced to any kind of science.”
Nevertheless, he says, “I’m struck by how much it’s already gone up, but that doesn’t mean it’s ready to come down.”
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