Japan is still sinking -- investors won't even buy their
government bonds anymore. Germany has become the Japan of Europe. Latin
America is a complete mess with Brazil about to swing left politically,
making an already bad situation even worse. World stock markets are tanking.
Wealth is being destroyed everywhere.
And as usual, the United States is the world's last, best hope.
But lately hope has been looking pretty thin on the home front.
A strong recovery at the start of the year has measurably
softened. In recent months, key indicators such as production, employment
and housing starts have all declined. The index of leading indicators has
fallen in four of the past five months. The stock market is still
desperately looking for a bottom.
Eighty-five million shareholders grew hopeful this summer when
President Bush commented favorably on an investor-tax-cut package that might
have relieved the double taxation of corporate dividends, increased
super-saver allowances, and improved the tax treatment of capital gains and
losses. For a few weeks, 401(k) owners -- who have watched their retirement
savings deflate to 201(k) status -- were optimistic that fiscal policy might
boost after-tax asset values.
But key administration officials put the kibosh on it. Office of
Management and Budget Director Mitch Daniels, normally a supply-side
advocate, has lapsed into deficit bean-counting austerity. Treasury
Secretary Paul O'Neill is missing in action. Political advisors got cold
feet over demagoging Democratic threats of "tax cuts for the rich."
Look again, fellas. Eighty-five million shareholders cannot all
be rich people. Moreover, roughly two-thirds of them vote, and they'll vote
for the party most likely to make them rich.
A pre-election contract with investors could have positioned
Bush Republicans with an exciting pro-growth message. But House and Senate
leaders, like the administration, seem to have lost their nerve. Club for
Growth president Steve Moore believes the GOP keeps the House if the Dow
Jones is above 8,500 by November. Well, don't hold your breath. Today's Dow
is around 7,850. That could spell Charlie Rangel as the next Ways and Means
chair. There's no flat tax coming from there.
Republican spokespeople think they have a strong growth message
that includes terrorism insurance, the energy bill and homeland security.
Forget about it. Those add up to no sex appeal, no panache and no
That leaves Greenspan & Co. to right the economic ship. And
that's always a high risk.
Recently, economic Nobelist Milton Friedman said the Fed should
be generous in creating money and it should err on the side of ease. He is
totally right, but key liquidity measures that stalled last winter must be
significantly strengthened. The Fed must recognize that the creation of new
money will halt the spread of deflation, support growing dollar needs in
Latin America and other parts of the globe, and relieve the lingering
corporate credit crunch.
Right now, our businesses are forced to put their spare change
into interest payments on outsized debt rather than create new jobs or
invest in new capital goods. Meanwhile, with businesses impaired by
government, prosecutors and the threat of class-action lawsuits, lenders are
not likely to do much new lending. This is a vicious cycle that can be
solved with fresh cash from the Fed.
Fortunately, a true double-dip recession is not yet on the
horizon. But a tepid 3 percent recovery rate is dangerously close to an
economic-growth pause. In fact, in an era of surging productivity, 3 percent
growth today is roughly equivalent to only 1 percent growth during earlier
times of low productivity. Take a look at crashing share prices among
telecom, media and information-technology companies that are signaling to
the Fed that the recovery rate should be twice as fast.
A legacy-worried Alan Greenspan has been saying that he didn't
create the bubble many blame for the soft economy and the
near-record-setting stock-market decline. Perhaps he's right. But the
present matters more than the past: The blue-chip Dow and the broader S&P
500 sit at five-year lows, and the technology-based Nasdaq has fallen to a
level not seen in six years. Euro stocks have sunk to five-year lows and
Japan to 19-year levels, as gloom deepens around the globe.
As economists and investors ponder uncertainties over the
impending war on Iraq, the importance of adequate money-adding should not be
debated. Much more rapid money creation should be the order of the day --
for the sake of a stock market rebound and the national security that comes
with a strong economy.
Unfortunately, the Federal Reserve again missed a key
opportunity with its recent decision to stand pat and do nothing. Big
mistake. It should have turned the cash spigots wide-open. The sooner it
figures this out, the faster the United States and the world economy will
produce real recovery.