The Feeble Patient

You must keep the sick patient on artificial respiration. This simple announcement was all that was needed to turn all of the world’s financial markets upside down yesterday. It is true that the patient is not only the American economy, which is the first in the world, but also that the decision comes from the central bank of the United States, which is the most powerful financial institution on the planet. If the patient had been in good shape, it would have ended treatment by raising its abnormally low interest rates. It hasn’t done it. If the recuperation was going well, it would have begun to unplug the catheters that have been pouring the liquid assets that hydrate the patient. It’s contradictory to keep up the dripping. That’s exactly what its decision to keep up the total of the financial titles on its balance sheet signifies, from allocating the money resulting from the reimbursement of obligations for housing agencies Fannie Mae and Freddie Mac to the buyback of new obligations from the American treasury.

The news has surprised all of those who had to swallow beautiful company profits for a spurt of growth. In reality, activity slowed down a year after restarting, which was the moment where it bloomed during preceding cycles. Trades died down. The economy again lost jobs in the past three months, after having created 1.5 million in the beginning of the year, and lost more than 8 million in the past 18 months. Housing is still down. Americans want to save, shattering the hope to return to a model based on hyper-consumption. Behind this cheerful little diagnostic was a common explanation: the debt accumulated during the crazy 2000s. It is heavy for businesses, excessive for the state and unbearable for millions of homes. And this mountain always threatens to bring on a terrible deflation.

In those conditions, the Fed has preferred to keep the dosage administered to the patient. Without a doubt, that was the best choice. It retains the possibility to raise the dose if the health of the patient deteriorates in the coming months — i.e., printing bills to buy up public debt. Afterward, its breathing room will become singularly limited. In a famous speech on the battle against deflation, which was given in 2002, Ben Bernanke mentioned the massive devaluation of the dollar as the ultimate weapon at his disposal. We hope that the Federal Reserve will succeed in avoiding the worst without going to a certain extreme.