Confidence among world leaders has noticeably deteriorated

There was no joy in Mudvilc Jackson Hole this year. The central bankers of the world have mucked things up so badly that not even their fancy words and Wizard of Oz pronouncements were enough to penetrate the gloom.

The US economy and Ben Bernanke’s optimism have deteriorated from the prior year. Fed policies have not worked, and there is increasing recognition they are the wrong tool for the job. Economic results, body language and confidence among world leaders has noticeably deteriorated.

Econophile provides an analysis of the Jackson Hole dog and pony show. He describes the outcome:

We are witnessing the failure of contemporary economics on a grand scale. These policies are being played out on the worldwide stage much to the same result. Europe is experiencing a culmination of years of failed policies.

What concerns me greatly is the next step. It doesn’t look likely that the Fed will embrace Austrian theory economics.

Instead they will try the same things again. ZIRP has been continued to 2013. Perhaps the Fed will reduce interest on excess reserves, or not pay interest at all, in order to encourage banks to lend. Perhaps it will pursue “Operation New Twist” and roll its portfolio over into even longer term maturities. Perhaps it will reduce bank reserve requirements temporarily (assuming it could get by Dodd-Frank and Basel III).

Then there is QE3, more monetary stimulus through direct injections of cash into the financial markets.

Despite Mr. Bernanke’s promise to the late Milton Friedman, it (Depression) is happening again. Bernanke is out of tools, resources and apparently hope. That he was using the wrong policies is the cause of his dispirit, although he still does not recognize that. For Ben, the situation and its timing could not be worse:

What this means is that during the presidential election cycle, politically sensitive economic indicators such as unemployment will remain negative. This will result in a lot of pressure on the Fed and Dr. Bernanke to “do something.” Like all former Fed Chairmen, it will be hard for Dr. Bernanke to resist these calls from politicians. He will earn his moniker as “Helicopter Ben” and unleash more quantitative easing, a dangerous and regressive policy. Like most drugs it becomes less effective over time. It will further destroy real capital and delay recovery.

I concur completely with the above paragraph, although would add one more important consideration to the list. Even if economic conditions were improving, this paragraph would still be true. The US will be unable to fund its deficits without the Fed printing money. Until spending is reduced, QE is with us regardless of the state of the economy.