The Economic Year in Review
12:00 AM, Dec 22, 2012 • By IRWIN M. STELZER
So it should come as no surprise that the price of gold, believed to have some intrinsic quality that makes it an inflation hedge, is ending the year about 4 percent above where it was when 2012 began. Or that the dollar is down against both the euro and sterling, even though those are the currencies of economies in recessions while ours is growing. If the printing presses run at top speed, can inflation be far behind? So far, no sign of that dreaded currency depreciator and investors in the U.S. refuse to panic even though the Fed and other central banks have decided to downplay their roles as inflation-fighters and turn their hands and powers to stimulating their economies.
That is a nothing less than a policy revolution, and as the Wall Street Journal points out, “Revolutions are rarely victimless. … Expect long-dated bonds to suffer and currencies to fall as central banks compete on stimulus.” Robert Samuelson, an economist and author of The Great Inflation and Its Aftermath adds in a recent column, “the Fed has tried this before and failed—with disastrous consequences.” Partly because the Fed’s zero interest rate policy prevents investors from earning anything approaching satisfactory returns on bonds, their hunt for yield led them to buy shares: As we approach Christmas, the Standard & Poor’s 500 share-price index is up about 14 percent from the first trading day of 2012.
The monetary policy gurus created a revolution; their fiscal policy counterparts created yearlong uncertainty. The president refuses to cut spending significantly, or to reform the tax code to increase the taxman’s take without stifling growth. Republicans refuse to raise tax rates, even on earnings above $1 million, as the speaker learned to his pain at weekend. The year opened with the nation on the brink of what Bernanke was the first to call “the fiscal cliff.” Whether there is a deal between now and year-end, we will enter 2013 staring into an abyss—a debt to GDP ratio so high that growth becomes impossible. It now is likely that we will add about $1 trillion to our debt mountain in every remaining year of the Obama administration, as we did this year.
So the economy has inched forward this year, with the labor market improving, the economy growing modestly on the back of the housing and auto sectors, and consumers increasingly optimistic. Shareholders have done well. But the tone of our politics remains rancorous, with fiscal policy on course to produce endless deficits. The Fed has announced a revolution in monetary policy, a borrow-now-and-pay-later program to accommodate the politicians by buying their IOUs. A mix of the good, the bad, and the ugly.
Next week: what all of this portends for 2013. Meanwhile, even in the absence of peace on earth, do enjoy this season of goodwill
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