IN OTHER WORDS: Long road
The Federal Reserve as much as admitted last week that lowering the benchmark interest rate would not be powerful enough medicine to revive today’s ailing economy. And so it has opted for the printing-press cure, pledging for the foreseeable future to pump vast sums into banks, other financial firms, businesses and households.
Flooding the economy with freshly printed money may prevent a self-reinforcing downward spiral. But it may cause trouble long after the present danger has passed. One reason is that it could cause inflation later. In a worst-case scenario, inflation, or the fear of inflation, could dissuade foreign investors from buying dollars. That, in turn, could provoke a disorderly decline in the currency.
To his credit, Obama has already warned the American people that conditions will get worse before they get better. In the attempt to make them better, the first question facing the next administration is the size of the stimulus. The latest numbers are in the $700 billion range. The economy certainly needs the help, but Obama officials will have to be mindful of the possible long-term negative effects of their outsized borrowing. While Obama must continue to level with the American his near-term moves will go a long way toward making the burdens yet to come more bearable.