By John Reizner |
President Obama announced on August 25, 2009 that Federal Reserve Chairman Ben Bernanke would be reappointed to another four year term. Bernanke's appointment, which will likely be confirmed by the Senate, may impact the course of American economic development for many years to come.
Many observers have speculated on what form the Chairman's exit strategy from his policy of monetary ease will take - a policy that saved a select group of failing companies (and their employees' jobs) and potentially prevented a deeper collapse of the stock market and financial system.
Here are seven possible consequences of the Bernanke exit strategy:
- The American stock market, after benefiting from the current high level of money creation, may suffer once the effects of potential Fed tightening tools (such as successive Federal Reserve discount rate increases) are felt. The discount rate is the interest rate at which banks may borrow funds directly from the Federal Reserve bank.
- The U.S. dollar may continue its long term decline as foreign nations see in the Obama administration's "buy now, pay later" fiscal policies, an unwillingness to address our fundamental debt problems by cutting spending and paying down our public debt. These nations may simply lose confidence in the dollar.
- Americans may perceive their currency to be unsafe should the long term decline of the dollar become unmanaged. Capital flows could accelerate out of the United States, possibly inciting government restrictions on capital flows by Americans (there is precedent for restrictions on capital flows in democracies, as was demonstrated after the rapid collapse of the Icelandic economy and currency in 2008).
- Interest rates may rise as a consequence of the Federal Reserve removing the current policy of monetary ease, lowering the value of long term bonds and raising the cost of debt financing by the U.S. government.
- The budget deficit may grow more than expected as a result of higher debt financing costs, possibly leading to future forced budget austerity by the Obama administration, or more likely, its successor administration.
- Higher inflation may accompany loftier interest rates as both a longer term consequence of monetary ease (too much money creation) and the timing of Ben Bernanke's potential tightening strategy. Stocks may be a reasonable hedge against inflation as company profits may rise in nominal terms along with costs.
- As a result of higher price levels, hedges against inflation such as oil, certain oil industry equities, physical gold and silver may polish off their ten year bull market.
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