Return to the Tetons: Perspective of Economic Obstacles Ahead



  • The economy bears the growing burden of private and public debt, which crushes investment, consumer sentiment, and spending
  • Financial institutions beaten up by the stock market could soon begin hemorrhaging from a liquidity drain

Last month, I made a personal odyssey to Grand Teton National Park and Jackson Hole, Wyoming. It’s the place where I discovered the American West while in college. Grand Teton is a mountain rising abruptly from its flat surroundings (the Hole) to jagged peaks with glacial snow rising above the spring like flora in the valley where the buffalo still roam.

It is the most majestic natural setting in America and a place that attracts many for its stark beauty, which resonates with an urge to tackle the mountain. Short of that, one can devise a plan to go around or test the foothills or even huddle below to endure the winter freeze.

Every August since 1982 the Federal Reserve returns to the base of the mountain, as it will do again this week, to gain perspective of our own economic hurdles and set the mountain-climbing agenda ahead. At the meeting last year, the Fed hatched the QE2 plan in response to an economy that was weighed down with a private debt load so unwieldy that it couldn't make it up and over the mountain. It amounted to a $600 billion government bond purchase over nine months, which is the amount normally purchased over a 15- to 20-year period. 

A year later, QE2 has provided only short-term benefits that quickly disappeared by the time it ran its course less than 60 days ago (see: Lacy Hunt on the Morass of Debt). The stock market bubble heralded by Fed Chairman Ben Bernanke as its crowning achievement has settled below pre-QE2 levels, as has the GDP growth rate, which is just fractionally positive. Inflation rates such as 14 percent for imports and 7.5 percent for producer prices would likely cause the Fed to back off from another money experiment that didn’t turn out well.

The same intractable growth and unemployment problems still exist, only worse, considering the elevated inflation rates. The Fed will come back to Jackson Hole to take the measure of the mountain once again. On top of the private debt load which prevents the successful scaling of the heights, the mountain must now be climbed bearing the dead weight of the growing burden of intractable public debt as well. Not only is the public debt intractable, but that fact crushes confidence in the future, which in turn crushes investment and consumer sentiment and, in turn, spending. To make matters worse, both the U.S. debt ceiling debacle and the recently concluded round of Euro debt discussions reveal the inability of governments either here or in Europe to devise a mountain-climbing strategy or a means to shed its debt or prevent further accumulation.

The governments of the U.S., with its marginal plan to shed the debt ballast over the next decade, and Europe, with no plan at all, have opted to camp in the valley, and we hope to survive the coming winter of austerity. True, they might send search parties to test the foothills for a competitiveness route out of here, a policy coordination route, or a jobs program, but those won't do the heavy lifting necessary to scale or find a pass through or over the mountain.

Alas, with the Fed once again staring at the mountain, it is being urged to take another brute-force approach, to be called QE3. But it will most likely hold its remaining powder dry, as it might be forced to be the lender of last resort when its policy Sherpas, the commercial banks and other financial institutions recently beaten up by the stock market, begin hemorrhaging from a liquidity drain. Indeed, the ECB has had to perform triage on the Euro Sherpas to the tune of nearly a half-trillion euros in loans to their banks, loans that would need to be repaid by the banks if the government bonds provided as collateral default. That would be an endgame of financial market crumbling from the bank’s sale of assets to repay depositors and others who foolishly supplied the banks with short-term funding (including U.S. money market funds).

I am no longer a believer in the manifest-destiny notion that we will necessarily hurdle the mountain with Lewis and Clark-like resourcefulness (they passed just north of here) and make “cheap” stocks more valuable. I would keep my personal powder dry until the issue of the mountain is resolved and until then seek out the flight to quality assets that are thriving in this harsh and uncertain environment (see: Reserve Currency Sovereign Defaults and the Flight to Quality Asset).

So here we sit in the valley looking up at the mountain, and our thoughts drift to choosing new leaders to replace those who are devoid of policy or leadership skills and only excel at finger pointing. Fear is accumulating that we will be stuck in this valley of austerity for a very long time.  As the Russians are fond of saying, it will be a cold winter.

This article originally appeared on Professor Lew Spellman’s blog, The Spellman Report.


The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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