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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (108460)	2/18/2010 1:45:58 PM
From: fred woodall	Respond to of 116555

The Inconvenient Truth Of Fed's Hoenig By Neal Lipschutz A DOW JONES NEWSWIRES COLUMN A veteran U.S. central banker has bravely presented us with his own inconvenient truth. It takes an optimist to believe the political will exists in the U.S. to see through his preferred remedy. In a speech text Tuesday discussing the long-term threat of huge fiscal budget deficits to the U.S. economy and to the independence of the U.S. central bank, Federal Reserve Bank of Kansas City President Thomas M. Hoenig said the following: "There is no way to avoid some short-term pain in fixing the fundamentals in our economy. It is inconvenient for the election cycle, and it is undeniably terrible to have at least 10% of the labor force out of work. But short cuts now mean people out of work again in only a few years because we again try and avoid difficult adjustments." The world is watching Greece right now to see if its populace will be willing to accept government austerity to pay down its debts and get them in better line with gross domestic output. But similar questions loom, albeit without the same intensity or deadlines, in every Western democracy. Will, when the time comes to pay back for the spending done to keep economies from the abyss, the voters of Western democracies vote for sacrifice? Will any of the politicians running for federal offices in these countries even have the courage to offer a platform of short-term pain to avoid the next crisis based on runaway sovereign debt? Will anyone vote for them? Macroeconomics and politics in our day are completely intertwined. And we seem unable to plan, to think ahead. We believe things will bump along and turn out all right. Until they don't. The late economist Herb Stein famously said, "If something cannot go on forever, it will stop." But, still, we are surprised and generally unprepared when it stops. "As a central banker, it is my responsibility to anticipate and avoid the consequences that an unchecked expansion of the debt may have on monetary policy," Hoenig said. He added that the pressures caused by huge deficits could threaten Fed independence. That independence is already under some assault in the U.S. Congress. "It seems inevitable that a government turns to its central bank to bridge budget shortfalls, with the result being too-rapid money creation and eventually, not immediately, high inflation," Hoenig said. "Such outcomes require either a cooperative central bank or an infringement on its independence." So, Hoenig understandably says, the time to act is before the fiscal burdens taken on by the U.S. government prove too much. That is a tough thing to say when government spending seems to still be a needed support for a light and fragile economic recovery. "Fiscal policy is on an unsustainable course," Hoenig said. "If pre-emptive corrective action is not taken...then the United States risks precipitating its own next crisis."