On Monetary Policy - Randall W. Forsyth

I have great respect for the financial analysis published by Barron's. All of the writers at the publication do an excellent job.

I think the following article sums up the situation that America faces with regard to economic growth in relation to monetary policy:

Forsyth, Randall W., 2010. Coming full circle on monetary policy. Barron's, Oct. 6.

Mr. Forsyth identifies an important, and largely unknown aspect of finance by hinting at the role of longer-term cycles in relation to market performance.

This is an excellent summary of 31 years of monetary policy:

"On Oct. 6, 1979, the Federal Reserve embarked on a fierce campaign to restore the dollar's value, both in terms of inflation at home and in the global currency markets. It meant extreme actions, culminating in short-term interest rates reaching the unprecedented heights of 20%. The U.S. economy sank into what then was the worst contraction and the longest period of sustained 9%-plus unemployment since the Great Depression. Once inflation was finally crushed, the economy embarked on the longest expansion ever known, interrupted only by two trivial recessions until the great credit collapse beginning in 2008."

To continue:

"Since then, monetary policy has been the polar opposite—short-term rates cut to an irreducible zero; massive Fed asset purchases to push down yields on intermediate- and long-term Treasuries and especially mortgages; and now, stimulus through a lower dollar, albeit unofficially. The aim has been to arrest a decline in inflation that now has been explicitly deemed as too low—which couldn't be much more different than 31 years ago. And while the U.S. economy emerged from the worst recession since the Great Depression, unemployment remains elevated above 9% for the longest stretch since the 1930s."

The efforts to avoid deflation through quantitative easing indicate a genuine fear by the Fed that the American economy will remain sluggish for some time into the future, calling into question the growth prospects for 2011. Already, several leading economists are announcing that there is no end in sight to the decreases in home values, a critical component of wealth for the average consumer. Deflation might already be a reality.

The corresponding effort of other large export-oriented economies to simultaneously devalue their currencies further complicate world economic matters. It will take time for things to settle in currency markets. Unfortunately, this adds uncertainty when the very existence of many businesses is at risk because of the inability to increase revenue.

In summary, I am not sure there is anything that either major political party can do to turn around the American economy quickly. There is no question that the national deficit must decrease. However, the process of cutting the Federal budget will place negative pressure on an already weak U.S. economy.

Perhaps the best cure is time and austerity. This is a hard message for the American public.