Big Ben said stop. I doubt that Ben Bernanke has ever seen “Portobello,” but the now-historic quote by Enzo Tortora perfectly describes this crucial moment in the U.S. economy.
By Wednesday afternoon, the U.S. must get back to walking on its own feet; Big Ben has started pulling the crutches off the Federal Reserve. Reducing the stimulus that the Fed pumps into the U.S. economy from $85 billion to $75 billion each month does not seem like much, but it is in reality a historic decision.
Bernanke’s message, one month before leaving the central bank, is clear: The comeback is solid, consumers are returning to stores and real estate firms, businesses are in good health, markets in the middle of a great dust-off.
Five years since the most devastating financial crisis since World War II, the Fed is starting to get out of the way, letting the most capitalist economy in the world and free markets do their thing.
To tell the truth, Bernanke and his people have added a spoonful of sugar to the slightly bitter medicine of the stimulus cut: the promise of keeping interest rates at their lowest for a long time, an undertaking that markets love.
As Michael Fredericks, who manages $5.5 billion for the investment funds giant BlackRock, said to my colleagues at The Wall Street Journal, “We’ve been joking for the last few years that we’ve been living in our parents’ basement and now our parents told us it’s time to get out.”
Is this going to work? It is a question that is worth a billion dollars and the future of the entire planet’s economy.
The immediate response by investors was enthusiastic. I was on the phone with a stock exchange operator at 2 p.m. on Wednesday when the Fed announced its decision, and I transcribed, translating his reaction, word for word: “Oh, oh, shit, they are cutting, cutting by 10, low rates, now, buy, buy, buy, I have to go.” He put down the phone and started buying stocks left and right. Almost all of his colleagues did the same thing; stock markets almost went haywire, breaking another record.
Even Asian markets, which had received a good part of the low-price capital that the Fed put into investors’ pockets, did not collapse, confident that the U.S. economy would shore up the rest of the world.
And it is here that the situation gets complicated, and the best by investors and commentators could be overblown. There are two problems, both fundamental but extremely different. The first is whether the U.S. economy will manage to sustain itself with the Fed in retreat. The second is whether this same economy will be able to sustain the rest of the world.
The answer to the first query is easier. With unemployment on the decline, low rates and cheap energy, the U.S. should be able to maintain an acceptable growth rate. Also, this is true because there is no need to exaggerate the Fed’s withdrawal.
The English word for Bernanke’s maneuver is “to taper,” a verb borrowed from tailoring that means “to get smaller,” like pant legs toward the bottom. The idea is that of a gradual and precise retreat, not dramatic and rapid.
In fact, the Fed’s long arm still extends into the real estate market. The central bank finances almost 90 percent of new mortgages, keeping interest rates artificially low and allowing millions of Americans to buy, or refinance, homes. And, the decision to keep the interest rates low will help consumer markets and investments, from credit card purchases to new manufacturing plants, on society’s part. Big Ben said “pause,” rather than stop.
In this sense, Friday’s numbers on the gross domestic product — a 4.1 percent increase in this year’s third trimester — are very encouraging. The U.S. is no longer in danger and is almost to the end of the post-crisis recovery period, but it is in no condition to act as the motor for the rest of the world.
There is a chilling figure that optimists need to keep in mind. From the end of the recession in 2009, the U.S. economy only grew by 2.3 percent per year, almost half the average of other expansions after World War II.
If the U.S. had grown at a “normal” pace, today the economy would have reached the entire GDP of a country like Mexico.
At these levels, the U.S. economy can barely pull itself. With China in a political transition phase and Europe still in crisis, there are no other serious candidates to lead the rest of the world. This is a problem for the U.S. economy as well, especially for the manufacturing industry, which will experience difficulties in exporting its products.
“No man is an island,” said the 16th century English poet John Donne; the same is true for the economies of 2013. In the era of globalization, economic growth needs to jump from continent to continent in order to remain strong and sustainable.
At this moment, the U.S. is an island — a happy island, but an island nevertheless. The aid that the U.S. really needs does not reside in Big Ben’s office, but behind the Great Wall of China, on the top floors of high-rises in Frankfurt and in the power corridors of Brussels.
As the Three Musketeers would say, “All for one, and one for all.”