Be Afraid; Be Very Afraid

From a column by Francis Cianfrocca at The New Ledger (hat tip He Who Needs No Linkage) on our response to the current economic crisis:

If this works, I’ll be the first to tip my hat to Ben Bernanke and the intellectual revolution he has founded. But it will be a repudiation of centuries of financial history. What’s far more likely to happen is that the massive reflation efforts will work for a time, possibly for years, possibly for a decade. In that time, some fundamental aspects of global finance and trade will need to be repaired. Two that spring to mind are the bad habit of Americans to spend beyond our means, and the worse habit of China and other developing countries to respond to our overspending by undervaluing their currencies and allowing their economies to overexpand.

The pathway to success for Bernankeism is all about buying time to reset the underlying imbalances. But it’s an extremely dangerous game because the tools of Bernankeism (and Obamian deficit spending) are all about giving us far more of what made us sick in the first place. If we can fix the basic problems before the painkillers wear off, we might be all right. If not, the game will end in a deflationary episode that could rival the Thirties.