Today's guest post is by Peppercommer Milos Sugovic.
It all comes down to framing. No matter what policy or program is being put into place, how you frame it limits or defines the inferences that individuals make about the message. The audience likes to pick a side, even though two seemingly conflicting alternatives are at the core no different. Take for example the Fed’s latest attempt to jump-start the economy – which the media calls QE2 or Quantitative Easing 2 - in which it recently decided to buy $600 billion in long-term Treasuries over the next eight months and reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments. These bond purchases will culminate in Q3 of 2011 and will inject about $900 billion into the U.S. economy.
Such a move by the central bank invariably creates downward pressure on interest rates, making borrowing cheaper. In a healthy economy that’s like taking a fat kid to a candy store. It stimulates short-term growth by encouraging businesses to borrow for the purpose of investing in capital and machinery, while it gets consumers to spend…and then spend some more. However, in an ailing economy, such outcomes - even though highly desired - are just wishful thinking.
The U.S. economy is a fat diabetic that has become irresponsive to insulin. A body suffering from type 2 diabetes needs insulin, but like all medication, its effectiveness diminishes beyond a certain level and can become fatal. The U.S. economy is no different: it has become desensitized to the central bank’s flood of liquidity and cheap credit. No surprise, quantitative easing isn’t working. And that’s because the problem isn’t a lack of credit, or that it’s too expensive. The problem is that our accumulated and excess dead weight- also known as debt- has been transferred from bubble to bubble. Replacing that “old” 40” LCD TV, which you borrowed money for in the first place with the new and improved 42” LED model that comes with those scarce necessities like Google, Facebook and Twitter, will do only one thing: increase your debt.
Unfortunately, the American Dream allows for no nightmares. So, the Fed is responding to consumer desires and is delivering cash in the form of "easy money" to an economy which has no need for it, except to gamble with in the financial markets. But blowing bubbles now and worrying about the consequences later is bound to backfire, as we have witnessed time and time again. Driving borrowing rates down to zero will obliterate the interest income for consumers with savings accounts and low-risk fixed investments. It is also likely to increase inflation, which will further eat away at the value of that shrinking interest income, especially because wages aren’t rising. Together, these forces will create a real interest rate equal to zero and incentives to take on more risk to earn a greater return – the same urge that got us into this mess in the first place. Is it any wonder that investors poured more than $18 billion into hedge funds in October, the highest level in 11 months?
“Lucky” for us the economy, like the body, has a way of correcting for imbalances and restoring equilibrium. The high unemployment rate is one way the bubble deflates itself. And no matter how hard the Fed and its troupe of chubby Americans try to swim against the current, they’re bound to fail. What’s needed is instead some tough love: some sweat, tears and then some more sweat.
But how does one sell such a message? No spinster can make lower spending and unemployment sound good, not even Mark Zandi, the chief economist and co-founder of Moody's. At the end of the day, it all comes down to framing. What got us in this mess is, paradoxically, high spending and excessive risk taking when investing. So, what will get us out of it is lower spending and a higher tax rate on risky investments – but such policies are doomed to face severe criticism. On the other hand, advocating for higher savings and lowering the tax rate on stable, long-term investments will do only one thing – generate applause. The funny thing is, the former is no different from the latter, apart from how it’s framed. That’s why, for us PR folks, it’s all about the formulation, not the logic, of an argument.