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Federal Reserve President Fisher: “You And I—Are Launching Fiscal Bombs Against Ourselves”
NationalEconomist.com ^

Posted on 05/29/2008 3:23:41 AM PDT by drbasketball

In one of the most remarkable speeches ever given by a Federal Reserve official, or for that matter any U.S. governement official, Dallas Fed President Richard Fisher, a voting member of the FOMC in 2008, told an audience at the Commonwealth Club of California, in a speech titiled, Storms on the Horizon, the truth about the current state of the United States economy.

He started by warning about the current inflationary problem...

(Excerpt) Read more at nationaleconomist.com ...


TOPICS: Business/Economy; Government; Politics
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1 posted on 05/29/2008 3:23:41 AM PDT by drbasketball
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To: drbasketball

In one of the most remarkable speeches ever given by a Federal Reserve official, or for that matter any U.S. government official, Dallas Fed President Richard Fisher, a voting member of the FOMC in 2008, told an audience at the Commonwealth Club of California, in a speech titiled, Storms on the Horizon, the truth about the current state of the United States economy.

He started by warning about the current inflationary problem:

…if inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario. Inflation is the most insidious enemy of capitalism. No central banker can countenance it, not least the men and women of the Federal Reserve.

Note the words “… even in the face of an anemic economic scenario”. Fisher is not talking about raising rates, if the economy gets better. He is talking about raising rates in an “anemic” economy. This is a man concerned about inflation, and he is correct. If you think the sub-prime crisis was a mess—when the Fed cut rates in an attempt to reverse the crisis, just wait to see what the economy is going to look like with the Fed raising rates while the economy tanks. We repeat, this is not us talking, it is a Federal Reserve voting member of the FOMC.

Fisher then goes on to explain just how bad the federal debt situation is in the United States really is:

Tonight, I want to talk about a different matter…I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct…The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road…

In keeping with the tradition of rosy scenarios, official budget projections suggest this deficit will be relatively short-lived. They almost always do. According to the official calculus, following a second $400-billion-plus deficit in 2009, the red ink should fall to $160 billion in 2010 and $95 billion in 2011, and then the budget swings to a $48 billion surplus in 2012.

If you do the math, however, you might be forgiven for sensing that these felicitous projections look a tad dodgy. To reach the projected 2012 surplus, outlays are assumed to rise at a 2.4 percent nominal annual rate over the next four years—less than half as fast as they rose the previous seven years. Revenue is assumed to rise at a 6.7 percent nominal annual rate over the next four years—almost double the rate of the past seven years. Using spending and revenue growth rates that have actually prevailed in recent years, the 2012 surplus quickly evaporates and becomes a deficit, potentially of several hundred billion dollars.

Doing deficit math is always a sobering exercise. It becomes an outright painful one when you apply your calculator to the long-run fiscal challenge posed by entitlement programs. Were I not a taciturn central banker, I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.

Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.

…Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon.

And some wonder why I am forecasting a climb in interest rates for the next 30 years.

Fisher is obviously very scared that pressure is going to come on the Fed to print money to solve the problem. He comes back to the dangers of money printing, in this remarkable speech:

We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid…Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy..

Of late, we have heard many complaints about the weakness of the dollar against the euro and other currencies. It was recently argued in the op-ed pages of the Financial Times… that one reason for the demise of the British pound was the need to liquidate England’s international reserves to pay off the costs of the Great Wars. In the end, the pound, it was essentially argued, was sunk by the kaiser’s army and Hitler’s bombs. Right now, we—you and I—are launching fiscal bombs against ourselves.

Fisher ends his speech with a cry for help:

You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.

When a Fed president sees the only solution being an electorate to save us all, when the electorate has nominated two spendthrifts as presidential candidates, one a domestic social progams spendthrift (Obama) and one an international warrior spendthrift (McCain), you can see why the country is in trouble and why a Fed president would choose Storms On the Horizon as the title to his speech. Storms on the horizon indeed, the financial dark ages are approaching quickly and Fisher knows it.


2 posted on 05/29/2008 4:14:29 AM PDT by misterrob (Obama-Does America Need Another Jimmy Carter?)
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To: drbasketball
WOW is all I can say, though none of what he said is surprising to me. I've been saying this stuff for years. I'm stunned and troubled that I'm the first post on this after having been posted almost 1 hour ago. I hope that many more contribute. Medicare/SS will be the undoing of our economy and it won't be that long until it happens. Add on oil struggles and we'd all better get ready to learn how to grow corn and raise cattle!
3 posted on 05/29/2008 4:22:07 AM PDT by mek1959
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To: mek1959

Fisher is a drama queen.


4 posted on 05/29/2008 4:30:42 AM PDT by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)
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To: mek1959

It’s clear that the enormous burden of lavish medical care and retirement benefits is killing our domestic auto industry, so it’s logical that such costs can kill our whole economy as well.


5 posted on 05/29/2008 5:13:49 AM PDT by hellbender
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To: drbasketball; ex-Texan; TigerLikesRooster; jas3; CodeToad; AndyJackson; ovrtaxt; nicmarlo; ...

6 posted on 05/29/2008 5:27:51 AM PDT by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: misterrob
That was then:

“The damage from the subprime market has been largely contained. Fortunately, the financial system and the economy are strong enough to weather this storm.”~~Richard Fisher, Federal Reserve Bank of Dallas President, Apr 4, 2007

This is now:

"Tonight, I want to talk about a different matter…I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct…"

7 posted on 05/29/2008 5:30:29 AM PDT by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Moonman62
Fisher is a drama queen.

Yeah, our economy is just as sound as the dollar! No worries! Onward and upward forever, because America is special!


8 posted on 05/29/2008 5:33:01 AM PDT by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Moonman62
drama queen

Oh yeah. Hyperinflation to bail out Wall street and you call Fisher a drama queen. What inflation? There's no inflation. Seasonally adjusted gas prices dropped in May. Did you hear the government statisticians. Dropped![/sarcasm]

9 posted on 05/29/2008 5:39:24 AM PDT by AndyJackson
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To: Travis McGee
I love that picture, Travis, of the pooch in the pink shades.

In Kunsan, Korea (USAF 1975, 1976), I stood guard mount one night with my German Shepherd. Skipper (10 year-old Shepherd) was wearing flight goggles and a scarf. It was winter — 30 degrees below zero.

The Second Lieutenant inspecting us troops that night said nothing as he gave me a once over. The fifteen others in my flight were trying not to laugh. When dismissed to post, the watch officer said to me, “Your dog is out of uniform,” but dropped it there, because there were no pertinent regulations regarding such.

10 posted on 05/29/2008 5:42:30 AM PDT by John Leland 1789
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To: Travis McGee

The government is trying to shore up a system teetering on a massive financial storm. Purists can say what they want but no administration is going to allow the system to fail and watch the calamity that follows. Higher interest rates might shore up the dollar but if you kill the economy then what good is it? My company is making good money exporting our products and even in this era of inflation our sales are likely to increase 20% y/y. If my inflation rate is 5% then crudely stated I am still up a great deal.

I won’t deny that government interference in the market has caused many problems but collective self interest is killing us as well. One day when the economy does come crashing down and the tax revenues with it people will come to find that their Sugar Daddy is no more.


11 posted on 05/29/2008 6:59:30 AM PDT by misterrob (Obama-Does America Need Another Jimmy Carter?)
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To: AndyJackson
Calling it a Wall St. bailout is a bit disingenuous. Hyper inflation is also a bit of hysteria to boot. Energy and food prices are not just from a weaker dollar but a result of global demand for energy and a limited supply. When environmentalism drives your energy policy something very bad is going to happen. Limiting access to oil, incentives to people to burn food/feedstock, mandating fuels efficiencies and contents, taking energy companies while giving money to companies who are “green” but produce lots of red ink, etc. is a recipe for high prices.

For those of us exporting goods and services business has never been better. Yes, I estimate that my household costs have increased about $300 per month but if my income goes up $25K a year then WTF do I care since my products are cheaper to overseas customers? And, I can drive a little less, keep the thermostat at a more reasonable level and don't waste money on items I don't need. Also, if I own stock in agro/energy/steel and other money making sectors then I am doing very, very well. Yes, my home value is down but if I invest cash in other places I can offset the losses.

12 posted on 05/29/2008 7:09:57 AM PDT by misterrob (Obama-Does America Need Another Jimmy Carter?)
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To: misterrob

“Rock, meet hard place.”

Or as the Spanish put it, we are between the sword and the wall.


13 posted on 05/29/2008 8:53:50 AM PDT by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Travis McGee

The near future of the US Economy? I smell a sewer.


14 posted on 05/29/2008 9:18:15 AM PDT by RSmithOpt (Liberalism: Highway to Hell)
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To: misterrob
I'm happy your personal finances are in such good shape. The article is about the approx. $100 TRILLION deficit in entitlements program. Somehow I don't think buying the right stocks and driving less is going to fix that.
15 posted on 05/29/2008 10:32:38 AM PDT by Jack Black
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To: misterrob
I'm happy your personal finances are in such good shape. The article is about the approx. $100 TRILLION deficit in entitlements program. Somehow I don't think buying the right stocks and driving less is going to fix that.
16 posted on 05/29/2008 10:32:51 AM PDT by Jack Black
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To: Jack Black

They aren’t as “entitled” as some might think.

When there isn’t enough money, they will simply have to curtail the benefits. You can do it, but it has to be a crisis first.

Make people work until they are older, limit access to government-funded health care.

Anyway, there’s no particular reason why medical care HAS to keep getting more expensive. It’s not based on some finite resources that are increasing in demand. We can train mor doctors, and for a lot of medicines the per-unit production costs are nearly zero.

Fortunately, if medicaid fails, the worst that happens is our eldest population dies off quicker, which alleviates a lot of the problems. That’s a rather unpopular way of looking at things, but the worse you get at paying for social security and medicare, the more the system corrects itself by the deaths of those you aren’t caring for.


17 posted on 05/29/2008 11:04:49 AM PDT by CharlesWayneCT
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To: CharlesWayneCT
Fortunately, if medicaid fails, the worst that happens is our eldest population dies off quicker, which alleviates a lot of the problems.

Ouch.

Government kills, but not as fast as bad government.

18 posted on 05/29/2008 11:18:57 AM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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To: misterrob; Travis McGee; M. Espinola
"In keeping with the tradition of rosy scenarios, official budget projections suggest this deficit will be relatively short-lived. They almost always do.

According to the official calculus, following a second $400-billion-plus deficit in 2009, the red ink should fall to $160 billion in 2010 and $95 billion in 2011, and then the budget swings to a $48 billion surplus in 2012 . . .

I call BS on this official calculus. In no way whatsoever will the federal deficit fall that much. It will not fall that fast either.

There was a report by the former head of the GOA. He was shouting to all who would listen that we were already $ 53 trillion in debt over Social Security. Nobody wanted to listen.

He just gave up -- resigned his position -- and faded into the sunset.

Check my freeper page frequently. I often post interesting tid bits there for more savvy people. Later, Alligators . . .

19 posted on 05/29/2008 12:01:08 PM PDT by ex-Texan (Matthew 7: 1 - 6)
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To: ex-Texan
He was shouting to all who would listen that we were already $ 53 trillion in debt over Social Security.

Still confusing debt and unfunded liability, aren't you?

He just gave up -- resigned his position -- and faded into the sunset.

He went to work for Peter Peterson.

20 posted on 05/29/2008 12:19:59 PM PDT by Toddsterpatriot (Why are doom and gloomers, union members and liberals so bad at math?)
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