Bernanke Finds The Elephant In The Room

Ben Bernanke has probably already seen accurate estimates of what unemployment figures for May look like. The ADP data indicates that the loss for non-farm payrolls will be well above 500,000 and perhaps as high as 550,000. That number, more than any other, tells the Fed chief that there is no recovery around the corner , that the recession has put down roots, and the small signs of an improvement in the economy that have been observed over the last few weeks don’t mean much.

Today, Mr. Bernanke told Congress it had to cut the deficit. It is a deficit the the federal government has only just begun to build, so it sounded like the Fed chief wanted Congress to reverse course as soon as possible.

Bernanke said that the US could not borrow “indefinitely”, which may be a statement of the obvious but is still not a part of policy. Policy is still set on spending the nation out of recession. That may work, but with IRS receipts falling faster than expected indefinite borrowing is still a part of the Treasury’s M.O.

Bernanke knows that Congress has a problem. Voters are already ambivalent about many of the government’s stimulus packages. Taxes will have to go higher. Compound interest already threatens to overwhelm the effects of national income on cutting the deficit. Unless the economy suddenly begins to grow at 4% or better and unemployment quickly drops back below 7%, the shrinking number of employed people will face a growing burden to bailout the government with deductions from their paychecks.

Interest rates on US debt are still fluctuating but they are bound to rise as the US borrows more money and is matched in its need for capital by other large established nations. Bernanke can control interest rates to the extent of setting bank rates and buying in Treasury and mortgage payment, but the Fed does not have enough money to smother the rate increases that will come as more and more trillions are raised in the world’s capital market.

Bernanke’s comments and concern about the $2 trillion deficit were muted, but he can see ahead a year when the red ink is still growing and there have been no significant cuts to federal spending. The Administration is not going to shut down its stimulus program and it would take that to cut the deficit quickly.

Douglas A. McIntyre