At first glance,
The economy appears to be going to Limbo if not Hades itself. To stop its descent, the Federal Reserve is cutting interest rates like mad and inventing (or reinventing) new ways of adding liquidity to the financial system and shoring up confidence. It may succeed, as it did in the wake of the S&L crisis, when it stopped a stock market panic in 1987 and kept the 1990-91 recession short and mild. Its predecessor, the Bank of the
The government is just as likely to fail to stop the slide. In 1929, the government did too little. Prices dropped, companies went out of business, millions lost work, defaults climbed, and banks began dropping like flies. It took years to recover and guess who suffered most? That’s right, the poor. Today’s government certainly doesn’t want another depression but one of its hands is tied. In addition to easing monetary policy (cutting interest rates), governments can thwart economic downturns with fiscal stimulus, cutting taxes or borrowing and spending in order to stimulate demand, keep companies in business, and people employed. Our monstrous national debt, coupled with the weak dollar, means the fiscal path is almost closed. The government could do more than the paltry tax rebate checks it has promised, but not much more.
So the Federal Reserve has had to reduce interest rates rapidly and will likely make more cuts. But here looms another bogeyman, runaway prices, as during the “Great Inflation” of the 1970s and early 1980s. Guess who gets hurt most by inflation? People rich enough to buy TIPs, gold, and other inflation hedges? Professionals who can easily negotiate higher fees? No, it is the poor, who will have a difficult time increasing their wages enough to match the higher cost of “little luxuries” like gasoline, electricity, clothes, and food.
The Founding Fathers knew better than to paint themselves into this corner. The new nation ran up a large debt winning its independence, fighting pirates and the French, and buying
Not much can be done about the national debt right now, except to watch it grow. When the financial system and the economy regain their footing, however, we need to have a long, hard conversation about how to repay what we owe, if not for our own sake then for those most threatened by it, the poor.