Return of double-dip fears — Jackson Hole conference shows US still not out of the hole

We have come a long way from the ‘Great Panic of
2008’, but there’s a long road ahead to robust growth, confident consumer
spending and lower unemployment. That was the essence of US Federal Reserve
Chairman Ben Bernanke’s speech at this year’s Jackson Hole conference last week.
It was a rather subdued Mr. Bernanke who sought to reassure his audience, by all
accounts. Confessing candidly that “central bankers alone cannot solve the
world’s problems”, Mr. Bernanke exuded guarded
optimism about the sustainability of the ongoing recovery in the US economy. He
conceded that the recovery “appears somewhat less vigorous than we expected”,
and did not rule out the possibility of deflationary tendencies reasserting
themselves. The thrust of Mr. Bernanke’s statement, which his critics have
attacked as “Nero fiddling while Rome is burning”, was to suggest that the good
news from the US economy was not good enough. Based on the latest national
income growth data for the US, released last week, US authorities have revised
downward the annual estimated rate of growth from the more optimistic initial
number of 2.4% to a significantly lower 1.6% in the quarter ending June 2010.
Export growth is near zero, unemployment levels are high and consumer spending
is still weak. “The prospect of high unemployment for a long period of time,”
said Mr. Bernanke, “remains a central concern of policy.”

Mr. Bernanke’s prognosis suggests that the spectre
of double-dip recession continues to haunt US policy-makers. It is now clear
that the economic slowdown the US faces is more structural than cyclical. This
means there are limits to monetary policy, a fact that Mr. Bernanke openly
confessed even as he assured his audience that the US Federal Open Market
Committee (FOMC) would be open to using all the weapons in its monetary policy
arsenal to stimulate growth, prevent deflation and ensure price stability.
Ending his speech, Mr. Bernanke said, rather chillingly, “Although what I have
just described is, I believe, the most plausible outcome, macroeconomic
projections are inherently uncertain, and the economy remains vulnerable to
unexpected developments.” That is more than a sobering thought. Are Mr. Bernanke
and his Jackson Hole companions being more cautious than necessary or more
optimistic than warranted ? Perhaps the Jackson Hole audience was trying to make
up for past hubris or is afflicted by the paranoia of failed magicians. The
problem for the US is that while monetary policy is unlikely to make much of a
difference, there isn’t much room for fiscal policy either, though the Barack
Obama administration has done more than most developed country governments to
use fiscal policy to stimulate demand. The US needs a boost of confidence in
itself and an investment in its capabilities.

(Source : The Business Standard, dated
30-8-2010)