US Economic Recovery: Hey Ben… It’s Time To Put On Your Bathrobe!
Last weekend I got a head start on my spring cleaning. I was going through my clothes closet when I came across something I had forgotten all about. It was a T-shirt commemorating my dad’s 60th birthday party.
I can’t believe that was ten years ago.
I picked up the shirt and memories from the party washed over me like it was yesterday. I have a lot of great memories from that day. The best ones were of my dad’s friends sharing stories about him.
One of the funnier stories was told by my dad’s good friend, Ed. They’ve known each other since their college days. It’s a friendship going back more than 50 years!
Getting back to the story…
Ed and his wife Phyllis, my mom and dad, and another couple, Ron and Mimi, used to get together all the time. One of the couples would often have the other two over on a Saturday night for dinner and drinks.
Now, my parents aren’t late night socializers. My dad usually starts getting sleepy around 10pm. But the other couples liked to keep the party going until the wee hours of the morning.
Here’s the funny part…
Whenever my parents hosted the party, everyone always knew when it was time to leave. When the clock struck 10, my dad would disappear for a few minutes. Then he would reappear… in his bathrobe.
It was a big signal the party had come to an end.
I share this story to make a point.
It’s time for Fed Chairman Ben Bernanke to put on his bathrobe. He needs to send a signal that the quantitative easing party is over.
Over the past two years, the Fed has pumped massive amounts of cash into our monetary system in order to stimulate the US economy. These moves were necessary to prevent the economy from falling into a deflationary spiral.
Remember, a deflationary spiral is exactly what brought about the Great Depression of the 1930s.
The problem with massive monetary stimulus though is it can lead to runaway inflation. The Fed must withdraw the excess monetary stimulus from the economy in a timely manner. If they wait too long, inflation can quickly get out of control.
And we all know how easily inflation can ruin our standard of living.
I say the time is now to begin removing the effects of quantitative easing from our monetary system. All the economic data this week shows the economic recovery is firmly on track.
Manufacturing activity expanded in February at the fastest rate since May 2004. Non-manufacturing activity, which has been accelerating for six straight months, hit the highest level since August 2005.
And the Fed’s own Beige Book report indicates overall economic activity is “increasing at a modest to moderate pace.”
Consumer spending is also continuing to improve. Despite rising gas prices, consumers spending increased again in January and in early February. And February retail sales figures beat analysts’ estimates for the fifth time in seven months.
What’s more, business spending levels look like they’re about to pick up sharply.
Small and medium sized businesses, the backbone of the US economy, are once again starting to borrow money. In the last three months of 2010, bank loans grew for the first time in two years. This is a clear sign companies are raising the capital needed to grow their businesses.
As you can see, the US economic recovery is gaining traction.
But it can all unravel faster than a cat’s ball of yarn if the Fed doesn’t act quickly. They must begin removing excess stimulus from the economy before it sparks runaway inflation.
Even Warren Buffett, a great fan of Bernanke and the stimulus program, believes it’s time to say goodbye to QE2. Just the other day, the Oracle of Omaha said, “[w]e are following policies that will lead to lots of inflation down the road if things don’t change.”
It’s better to be safe than sorry where inflation is concerned.
Put on your bathrobe Ben. We don’t want the economy to suffer from too big of a hangover.
Category: Bonds
