This article is the unedited version of Scott Powell’s September 8, 2016 Wall Street Journal letter to the editor.
In his article, “The 5,000-Year Government Debt Bubble” assistant editor James Freeman’s observation that Fed Chair Janet Yellen’s “tool kit is already crowded,” could be interpreted as inferring that there are ways for the Fed to intervene and mitigate the next economic downturn.
The Fed has actually come to the end of the line. At the recent Jackson Hole conference, Ms. Yellen acknowledged that her options were quite limited, with the main tool of lowering interest rates being of little consequence in a near zero interest rate environment.
Her two-fold remaining tools — 1) returning to Fed bond-buying — perhaps adding corporate debt to the already approved central bank asset class purchases of U.S. Treasuries and mortgage-backed bonds; and 2) providing forward guidance on the expected path of interest rates — would likely be less effective than they were in dealing with the aftermath of the 2008 financial crisis. Adding more debt to an already bloated Fed balance sheet of nearly $4.5 trillion would increase systemic risk, while forward guidance would be meaningless window-dressing in the face of a serious downturn.
To her credit and perhaps underreported from her Jackson Hole speech, Ms. Yellen inferred that OECD government policy makers’ overreliance on zero and negative interest rate and bond buying monetary policies have enabled the continuation of unsustainable paths while downplaying the crucial need for structural, regulatory and fiscal reform directed at spurring economic growth. It may be late, but it’s about time that central bankers focus on the critical importance of economic growth rather than continuing as hand-maidens of a 5,000-year government debt bubble and collapse.