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Drunken Sailors to Sober Up or Walk the Plank

12:00 AM, May 21, 2011 • By IRWIN M. STELZER
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The first of these is a shift in the nature of political debate in America. After decades of figuring how much to spend, politicians are forced to discuss how much spending to cut – to confront the fact that Americans cannot afford all of the goodies to which they have grown accustomed, and expect to remain accustomed. It is not that the nation’s credit card is maxed out, as some choose to put it. It is that the political acceptability of borrowing to pay off the balance has declined, and scrooge has replaced the drunken sailors who have been in charge of the ship. The effect of this won’t be felt immediately, as some of the profligate sailors refuse to give up control. But their time has come and passed, and their vessel is about to be boarded not only by Tea Partiers, but by like-minded citizens. They will either have to give up spending or walk the plank back into private life.

Along with a winding down of uncontrolled government spending we are about to witness the beaching of QE2, to continue the now overly extended naval analogy if I may. Federal Reserve Board chairman Ben Bernanke will most likely not sacrifice his remaining credibility by listening to the crew members who want to set sail on a new QE3, never mind that such a launch might sink the dollar, which the World Bank is already predicting will lose its dominance as the euro (you know, the currency used by Greece, Portugal and Ireland) and renminbi (you know, the one subject to manipulation by the Chinese regime) achieve equal footing in a new “multi-currency” world. Bernanke is under pressure from presidential wannabe Congressman Ron Paul and a perfervid group of followers who are calling for the abolition of the Fed. They won’t prevail, but they will make congressmen calling for major reforms of the central bank seem less extreme by comparison.       

The combination of less expansive fiscal policy, the end of QE2 and the overtime operation of the currency printing presses, and the eventual if gradual implementation of the Fed’s plan to tighten the money supply by selling off its swollen portfolio of mortgages, promises a new era in American economics. The government and the Fed will now be providing headwinds rather than tailwinds as the private sector struggles to accelerate its growth rate.

Then there is what appears to be a shift in the balance of commercial advantage between the U.S. and China. Not yet visible, but very real. China is running into what environmentalists would call the limits of growth – inadequate water and other resources to support a continuation of its growth. Its decreasingly cowed workers are driving labor costs up, reducing China’s cost advantage over America’s more productive work force. To control inflation the regime is being forced to let its currency creep up in value, further eroding its trading advantage.

This is not to say that daily, weekly, and monthly data releases and the negotiations over the debt ceiling are irrelevant to such things as consumer and business confidence. They matter. But not as much, in the longer run, as the less obvious policy and competitive shifts that will dictate the future health of the American economy.   

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