Bernanke Warns House Budget Committee about U.S. Debt

Fed Chairmen Ben Bernanke's testified to Paul Ryan's House Budget Committee this morning. The overall message of the testimony was that the sluggish economy is very vulnerable and massive government debt is leading to serious consequences for the future of our country. We note that Barack Obama will have increased the national debt by more than $6 trillion, greater than $20,000 per American, by the end of his 4 year term.

Some highlights:

• "higher interest rates, bigger deficits, bigger debt" 
• "Slow growth in some European countries"
• "massive fiscal contraction in 2013 will disrupt the economy"
• Cut spending
• Cut the deficit
• 2017 until "normalized" economy with 5% to 6% unemployment
• "Inflation goal is 2%"
• 2011 1.7% GDP growth, the Fed had estimated 3.4 to 3.9% GDP growth
• 2012 GDP growth Fed estimate was 3.5% to 4.4% has been revised down to 2% GDP growth
• Bernanke is "not concerned" about inflation because the fed can "simply sell assets" or "raise interest rates" 
• "the question is whether we tighten (interest rates) too early or too late"
• "small businesses cannot access bank credit."
• We need sound energy policy:  "companies want clarity about what energy sources are going to be used. The main issues there are environmental."
• Households face significant headwinds in the economy
• America currently has "under utilization of capital and labor"
• We need to fix the housing market
• We "gotta have a creditable plan in place...into the next decade"
• Revenue increases and government discretionary spending restraint are not enough to deal with long term structural deficit.
• "You could cut discretionary spending to zero and not solve the problem in the long term."
• "changing the taxes on higher income individuals, but that by itself is not going to close the budget deficit either."
• "I don't know of another comprehensive plan (other than the Ryan plan)."
• "The elephant in the room is health care costs. We are heading toward 9 or 10% of GDP just from federal spending on health care and another 8 or 9% in private health care spending."
• "...the things we are spending on, are they going to help our economy? ...Will they help our economy grow in the long run?... on the tax side, are we moving towards a more efficient more effective tax code? Simpler, fairer and light... the way the money is spent, they way the money is collected makes a difference in terms of jobs and growth."
• Capital Gains: "Tax consumption rather than saving or investment. That is the rational for lower rates on capital gains and capital income. There is some effect on the rate of after tax rate of return on investment decisions but there is disagreement about how strong it is."
• "for innovative industries, I think we generally agree that the private sector is better. China is an example (of a communist state)...they allow the private sector a large roll in the development of new industries."
• "The private sector, because of the profit motive and so on, is often better at innovating (than government.)...government investments in the space program and the internet have paid off."
• Taxes reductions would have created a better economic outcome than stimulus: "the private sector, clearly, is where the decisions about what industries and products should take place."
• European Central Banking (ECB) system is under capitalized.
• ECB money swap agreements: "3 or 4% increase in the high powered money supply."
• "the question is not that if tax cuts fully pay for themselves." Bernanke assumes they do not immediately pay for themselves, but "The question is whether they increase efficiency and growth but not whether they fully pay for themselves."
• Why Canada's economy is better off: because "banks did not get involved in sub prime mortgages."
• Rep. Diane Black, Republican from Tennessee, summarizes Ben Bernanke's testimony on the national debt as "debt crowds out private capital, reduces productivity growth which results in more borrowing and increases our future income devoted to interest payments which increases the amount of debt. (National debt) impairs the ability of policymakers to respond effectively to future shocks or adverse events. Unsustainable deficits increase the possibility of sudden fiscal crisis."

While the Fed chairman testified the stock market was slightly up as oil prices were down slightly. The interesting aspect of the market during the testimony was in gold and silver prices. The long term threats of inflation and interest rates due to the massive national deficit are pushing up gold and silver. Gold has been up as much as 14 points this morning at $1763.50/ounce and silver was up as much as .50 cents at $34.51. 

"Bull" markets in gold and silver commodities traditionally coincide with a "bear" stock market. The fact that these commodity prices are up and the stock market is not in free fall is significant. It could point to a devaluation of the dollar in real terms which would inflate prices of all assets including stocks.

Several Democrats cites Obama's lie about creating 3 million jobs which we outlined on January 24th. The CBO recently estimated that the stimulus only reduced unemployment by 1.8% at its peak. The Bureau of Labor Statistics releases its revised unemployment numbers, Current Population Survey (CPS), on February 3, 2012. Changes to data collected on unemployment duration in BLS statistics will be included in this new release.