November 11, 2010

Bi-polar government

The United States government has really lost touch with reality. That is not to say that people with bi-polar disorder have lost touch with reality. I mean bi-polar in an entirely different context. The quantitative easing (QE2) being undertaken by the Fed (not really the government but kinda, sorta the government) is about to pump $600 billion into the money supply, effectively printing money. It would seem in effect they are trying to inflate the economy out of a recessionary or at least stagnant funk. Newtonian physics apply - for every action there is an equal and opposite reaction - deflation, in this case in the value of the dollar. But that's not even where the bi-polar nature of the government begins.

While all of this is going on, the Deficit Commission has released its recommendations on how to trim trillions off the national debt. Surely a good thing, although the specifics of their recommendations require more scrutiny since there is undoubtedly a lot to consider. Regardless of whether the specifics are the best ideas or not, at least the recommendations give life to the notion that this is a critical problem that must be addressed and it merits painful decisions and has major consequences. That's a different discussion.

What strikes me as bi-polar is the fact that the use of quantitative easing is tantamount to the government avoiding its deficit and debt problems.  As James Woods points out in an excellent article at Seeking Alpha,
Politically, doing Quantitative Easing will remove pressure from the issue of solving the budget deficits problem. A year delay in dealing with the deficits problem because of Quantitative Easing means over another trillion dollars added to the deficits, making the deficit problem even greater for the US. The US deficits will eventually increase the borrowing costs of the US government.
So you've got government saying we need drastic cuts to stop deficit spending, and you've got the Fed making it easier for the government to continue to borrow with impunity (at least in the short term). That strikes me as bi-polar in terms of direction.

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