After a disappointing December Non-Farm Payrolls report, market participants were treated to a speech from Federal Reserve Chairman Ben Bernanke to the Senate Budget Committee. Bernanke used this opportunity to reiterate that the current path of fiscal policy is unsustainable:
It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence.
He went on to say:
Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress will seek reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit but also to enhance the long-term growth potential of our economy -- for example, by encouraging investment in physical and human capital, by promoting research and development, by providing necessary public infrastructure, and by reducing disincentives to work and to save. We cannot grow out of our fiscal imbalances, but a more productive economy would ease the tradeoffs that we face.
Okay, all of this sounds good and logical, but does it really mean anything? And more importantly, will Congress listen and actually implement any of it? I believe the short answer is "No." Congress will continue in its profligate ways and only address crises as they appear. It seems the term "preemptive" is only used by the U.S. military -- definitely not by the U.S. Congress.
It is interesting that in the same week, PIMCO’s Bill Gross, European Central Bank (ECB) president Jean-Claude Trichet and Fed chairman Bernanke all weighed in, aggressively preaching the gospel of tighter fiscal policy and spending restraint. Trichet told German lawmakers that “Monetary-policy responsibility cannot substitute for government irresponsibility," adding that the ECB’s decision to purchase eurozone sovereign bonds “was certainly not to finance debt-laden member states, but to address some severe malfunctioning of markets."
In other words, the ECB has been fulfilling its responsibility to maintain orderly functioning markets; meanwhile, the ECB is imploring EU lawmakers to get their act together and to implement serious fiscal policy changes.
Gross made some excellent points as usual, and his monthly investment outlookis a must-read for any market participant/watcher. Perhaps the simplest yet most important point made by Gross is the fact that American citizens and politicians don’t have a real understanding of the costs of trillion-dollar deficits.
Gross says:
Unlike Euroland or the United Kingdom, which appear to have gone on an extreme fiscal diet, the American answer to a bulging waistline is always “mañana.” Debt commission recommendations are tossed in the trashcan, tea party election rhetoric eventually focuses on miniscule and merely symbolic earmarks, and both Democrats and Republicans congratulate each other on their ability to reach a bipartisan agreement for the good of the nation.
I couldn’t have said it better myself: 2011 has started off with arguably the three most powerful men (none of whom have fiscal policy authority or responsibility) in the world of economics/finance talking tough on deficit spending and fiscal policy. This begs the question: Will all of this talk amount to anything, and when will the global debt markets begin to punish the United States for its fiscal profligacy?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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