Through the Fog of Economic Uncertainty

So what does all of this mean for 2009? Remember: this is a guess, not a forecast. It is difficult to see how all of the money that will be sloshing around the economy will fail to produce some sort of recovery. Here is a benchmark to use when confronted by those who say that similar policies didn't work in Japan: Capital Economics reports that total bank reserves rose fivefold in the first year of Japan's expansion of its money supply; U.S. reserves have already grown nearly fourteen-fold in just two months. Bernanke is determined to drive down the cost of mortgages and of corporate and interbank borrowing, and there are signs that he is succeeding. The federal government is determined to shore up almost any firm that claims to provide a lot of jobs, or to be "too interconnected to fail", and to rebuild the nation's infrastructure, broadly defined. Consumers are skittish, and are borrowing and spending less, but government spending will more than make up the shortfall: economists at Goldman Sachs say that the "sharp retrenchment by the private sector" requires "the government to step in with fiscal stimulus". Obama is glad to oblige. The wall of money stashed in low-paying Treasury IOUs will sooner or later wash back into shares and corporate bonds. The $500 billion that Bernanke will use to buy up mortgage-backed securities cannot but help to loosen that part of the credit market, just as the bail-out of General Motors' credit arm, GMAC will make it easier for less credit-worthy consumers to buy cars with no down payment and no interest charges.

Moves such as that might be recreating the excess credit culture that brought us to this pass, but better that than a prolonged recession--so believe politicians for whom the 2010 elections are just around the corner, and Bernanke, whose claim to academic fame is his study of the causes of the Great Depression, and whose Fed has pledged to "take whatever steps were necessary to support the recovery of the economy".

It will be surprising indeed if all of these moves, many of which have yet to be fully implemented but nevertheless already have "measures of financial distress improving gradually, albeit unsteadily", according to Goldman Sachs' economists, don't put the economy on the path to recovery by the end of the year. And on the path to a round of inflation that the Fed, with Larry Summers, ticketed to take over the chairman's seat, and Obama's other advisors feel they can pinch off by quickly draining excess liquidity from the economy by raising interest rates and--you guessed it--taxes.

Meanwhile, many Americans remain preoccupied with three things: their weight, their smoking habit, and their spending pattern. Diet, kicking the habit, and spending less top the resolutions that were solemnly made on New Year's day. Fortunately, 60 percent of Americans declined to make any such resolution, so only a minority--some portion of the 40 percent who believe they can change--will be feeling guilty year hence.

More important, according to that same Marist Poll, 56 percent of Americans are optimistic about what 2009 has in store for us. Fifty percent of men and 62 percent or women "think good things are going to happen" this year, with the young leading the way: 64 percent of Americans under the age of 45 "think the world will be a better place" in 2009--probably a reflection of their faith in the restorative powers of Barack Obama.

This, of course, contradicts still another poll: Consumer confidence is at an all-time low, having fallen from an index level of 90.6 a year ago to a mere 38. So we are left to guess at the mood of Americans. My view is that we are a bit rattled by the state of the economy, and when asked about economic prospects, or to unsheathe plastic in a shopping mall, we respond with nervous gloom. But when asked more generally about the outlook for the nation, our natural optimism reasserts itself. It takes a lot more than a 40 percent decline in share prices, the prospect of double-digit unemployment and a recession to dim the optimism of most Americans--and of the millions around the world who want to come here to seek their fortunes.

Let me thank those who have followed these pieces in the past year, and wish all a happier 2009.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).