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Reasons Why the Next Fed Chairman Will Fail

Politics / US Federal Reserve Bank Sep 20, 2013 - 05:27 PM GMT

By: Money_Morning


Garrett Baldwin writes: As we get closer to the end of the tenure of U.S. Federal Reserve Chairman Ben Bernanke, pundits are falling over themselves trying to predict who the next Fed chairman will be.

Larry Summers, supposedly U.S. President Barack Obama's favorite for the job, caused the markets to soar when he took himself out of the running.

That's left Janet Yellen, the brilliant vice chair of Ben Bernanke's clubhouse and the former head of the Council of Economic Advisors under President Bill Clinton, as the default favorite.

But I've got news for all those folks frantically trying to handicap who will be named the next Fed chairman.

It won't matter.

Any euphoria from the pick of the next Fed chairman won't last. It may take six months. It may take two years.

But no Fed chief will be able to fix the fundamental problems with the U.S. economy that very few Americans comprehend and many mainstream economists seem eager to avoid.

There are four long-term major drags on the U.S. economy, and no Fed chief will be able to do anything to fix them.

Why? Because outside of the inflation needed to pay off our massive debt levels, the fundamental problems are Congress' responsibilities.

Yet Washington has somehow made the central bank the focus of economic planning and development in America - which is completely backwards. Pumping and borrowing don't offer real economic growth, just the façade of improvement. It offers political cover, but nothing of substance.

It's paper shuffling and rabbit tricks. It's the same shell game mentality of Lehman Brothers accountants.

It's going to be fast, political, and brutal for Americans...

Why the Next Fed Chairman Is Doomed to Fail

The best efforts of the government and the Federal Reserve to paper over the gravely serious problems with the U.S. economy over the past several years are bound to come unraveled sooner or later.

The next Fed chairman will have little choice but to simply pave over the wreckage with more loose policy and accounting gambits.

Here's what he or she faces...

1. Inflation isn't going to fix the problem of government spending.

In recent years, President Obama said we have a revenue problem, not a spending problem. That's funny, because this year we raised more money in tax revenues than at any point in our nation's history, and we still have a deficit level that is staggering.

The national debt is on an unsustainable path. The Congressional Budget Office (CBO) announced Tuesday that growing future deficits will push the debt to 100% of gross domestic product 25 years from now.

There's only three ways out of this: significant inflation (which reduces the debt be devaluing the dollar - and everyone's savings), increased taxation on current production (which just crushes economic development), or higher tax revenues off a massive increase in production and development.

Given that heavy government regulation makes a huge surge in the economy unlikely, let's cross the third option off for now and, probably, until at least 2020.

So as debt levels continue to soar and service levels rise, the federal government will need the next Fed chairman to help solve the problem. That means lower interest rates or inflation to dissolve debt values. And neither will instill much confidence for future investors.

2. Regulations by Congress/states are crushing opportunity.

Congress and the president are responsible for instilling confidence by implementing pro-growth policies. But a mountain of regulations continues to strangle this economy. Each year, the federal government adds 4,000 new regulations to the economy, and that has a drag of $1.8 trillion every single year.

Is it any wonder that entrepreneurialism is down from 11% to 7% under the Obama administration's reign? The trend has been going downward for more than a decade as Big Government interventions in the marketplace have made it harder to do business than ever before. Unless the government listens and allows independent economists to conduct a cost-benefit analysis on each new "idea" the Congress or regulatory agent gets, this drag on the economy will only get worse.

The United States has plummeted in the Economic Freedom Index over the last decade, but our politicians simply aren't smart enough to understand the correlation between freedom and business development. Unless the red tape starts getting cut soon, the next Fed chairman is going to have to engage in more wizardry in order to prop up this struggle bus, because new jobs and new businesses won't be developing in the United States.

3. The crippling economic wage gap continues.

Progressives love to talk about the struggling divide between rich and poor. For anyone under 35, it's an absolute jungle.

Rising student loan costs, dramatic cost of living increases, and stagnating pay have been serious drags on the younger generations. Why that gap has continued to widen, however, hasn't been much explored.

The U.S. wage-productivity gap has been driven heavily by the use of automation and technology, which is displacing workers at a faster pace than new jobs and categories have been created. Some have tried to argue otherwise, but there is mounting evidence that the lost decade in Japan has been driven by productivity gaps in income and that Americans stand to experience the same, as the wealth generated by expanded scale and technological innovation are going to the few, while the masses receive a smaller slice than in the past.

Liberal-leaning economists don't address this issue in depth because 1) it is impossible for them to put into models, and 2) it sounds Marxist in nature, and no one wants to be tied to the bearded fellow. The reality, however, is that this problem predated Marxist theory and was written about extensively by David Riccardo, the father of comparative advantage.

Technology makes things faster, cheaper, and more productive and creates new opportunities. But it also enables creative destruction, destroying something old to create something new. It is that transition from old to new that we need to better manage.

The new jobs and industries required to replace the displaced aren't popping up around the country the way they used to.

And that's not something the next Fed chairman will be able to do much about.

4. The U.S. labor force lacks the skills it needs to compete in the global marketplace.

Finally, the U.S. education system isn't doing enough to train the workers of the future. Right now, there are 3 million open jobs in the United States, and every one of them could provide economic development, taxation, and new products or services to this economy. Unfortunately, the top reason many of these jobs go unfilled is due to a lack of qualifications.

The United States spends more money on education than any other country on a per-student basis. Still, we find ourselves trailing other developing economies in key math and science categories required by millions of jobs.

Government wants to throw more money at the problem because that's the easy solution. But what's needed is total reform.

The longer we wait to fix the education system, the longer this nation will find itself plagued with economic inequality, stagnation, and uncertainty. It's just too big of a problem for Washington right now. Or, they simply don't want to address it, because shaking up the status quo might hurt them with the constituencies that rely on government waste for survival.

It's all part of a backward economic culture gone awry.

But the scariest part isn't even that all these issues will be beyond the control of the next Fed chairman. It's that the next Fed chairman will keep trying to solve them anyway with the same bad policies.

Since the financial crisis erupted, the Federal Reserve has become the root of economic activity in the United States as markets have become addicted to stimulus, shortcuts, and free money. It's going to be one hell of a ride over the next three years while we struggle with the real problems that Washington continues to avoid while politicizing every aspect of the markets to the point of suffocation.

But all the pumping and churning isn't going to change the fact that the U.S. economy is being dragged down by politicians whose policies to save us from ourselves have led to horrific unintended consequences.

Source :

Money Morning/The Money Map Report

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