Back in the spring, Ben Bernanke told the world that “tapering” would start “later this year”. The Federal Reserve Chairman was indicating, in other words, that America’s central bank would start to wind-down its $85-a-month money-printing habit by the end of 2013.
Such an outcome now looks increasingly unlikely. My view, in fact, is that the Fed, could soon unleash more, not less, quantitative easing – ramping up the policy rather than tapering. Such an outcome, were it to happen, would be incredibly risky. Speeding up monetary stimulation, rather than slowing it down, could spook financial markets – and even cause a panic. Yet in recent weeks, I’ve heard several well-placed economists and policy-makers, especially in the US, start to contemplate such action.
Financial markets remain fixated on the question of whether or not America’s political classes will impose an entirely avoidable disaster on themselves, their fellow US citizens and, by extension, the rest of the world. While there are signs of rapprochement this weekend, Congress may yet fail to agree a new “debt-ceiling” limit. That could spark a world-wide market meltdown, so upending the fragile global recovery.
Those on the Democrat side of the aisle feel they’re on solid ground. The party controls both the White House and the Senate. President Obama’s sweeping healthcare reforms have been extensively debated, passed into law and ratified. And last year he was re-elected, no less, having campaigned on a ticket featuring this policy.
While still in opposition, David Cameron used to promise that a “Conservative government would share the proceeds of growth” between higher public expenditure and tax cuts. That was the Tory mantra – repeated ad nauseam from 2005 until the summer of 2008. It was a slippery phrase, allowing the Cameroons to have it both ways. By pledging to “match Gordon Brown’s spending plans”, Cameron hoped to banish the Tories’ “nasty party” reputation. The promised lower taxes, meanwhile, placated his core vote.
While “sharing the proceeds of growth” seemed like clever political positioning, it was actually economic nonsense. Brown’s spending plans, coming after years of turbo-charged state borrowing, were profligate. Matching them was “me too” student politics. Talk to some senior Tories now and, when recalling the “sharing the proceeds of growth” years, their eyes roll as their right index finger faintly twirls.
On 18th September, the Federal Reserve announced that it wasn’t about to start slowing its $85bn-a-month money printing habit? Why did the US central bank decide not to “taper”? The official line is that the Fed was worried about the impact of higher mortgage rates on the still-shaky US housing market. Fed Chairman Ben Bernanke also outlined his concern that the American labour market is weaker than it seems.
Another possible reason for the taper delay, one not cited by Bernanke, is that we’re in the “debt-ceiling season”, with Democrats and Republicans indulging in their seemingly annual game of posturing and buck-passing. Washington is playing chicken, once again, over the prospect of a US sovereign default.