Last week, Federal Reserve Chair Ben Bernanke spoke of a slowing world economy at the annual fete of world economists in Jackson Hole, Wyoming.  His speech was  characterized by the typically measured prose of someone whose choice of adverbs has the capacity to send markets diving.  However, to an experienced listener, two interesting tidbits emerged. 

The first of these should be familiar to readers of this column, to wit a recognition that the world economy is slowing.  This admission is important because a slowing world economy, as opposed to slower growth in, say, Europe, suggests increased risk of a recession here at home.  I have said since May that a U.S. recession is nearly certain, and Dr. Bernanke's remarks suggest that more economic models are saying the same thing.                                                  

The second important deduction from Dr. Bernanke’s speech is that he believes quantitative easing, a tool that has been used twice before, might soon be deployed again to boost the economy.  He explained that previous bouts of quantitative easing had been successful when weighing the balance of evidence. While I am sure he has research to suggest this is true, I am afraid that the benchmark for success today might be a good bit lower than most of us would prefer. 

What worries me most about another round of Fed actions is that the economic models used in these policies also argue that a government’s debt acts as a counterbalance to its success.  Explaining this adequately involves a fairly sophisticated argument that includes some heavy-duty math. Suffice it to say that Federal Reserve purchases of additional securities will boost the money supply. In normal times, this would be expected to fool people into thinking the extra supply of money was an increase in demand for goods.  Ultimately of course, this boosting of this money supply leads to inflation.  Normally, this inflation would be mild, and perhaps barely noticed.  Today, the very large increase in money supply means that inflation has no real curbs.  More worrisome, this inflation combined with a large debt constrains growth.  So, the setting for a big bout of inflation and low growth haunts any Fed action.

We have added almost $2,000,000,000,000 in debt since the last quantitative easing in 2010. This means that the success of any new efforts will be far more muted than the last one, and does anyone remember how well the last round knocked down unemployment?

I fear we are at a point where we are largely out of policy choices.  Every stimulus action, from either the Federal Reserve or congress, will be muted by the already large debt hanging over us.  There is nothing in our economy to suggest rapid growth is around the corner.  We can wait; of course, the economy will eventually recover, but that will take years.  We could try an enormous deficit reduction, but even a 20 percent cut in spending will leave us a debt requiring a generation to pay down.  This is a bad spot to be in.