The Federal Reserve Isn't Expecting Much Economic Growth in 2009
Tuesday, January 06, 2009SUSIE GHARIB: That pessimism about the economy was reinforced today by the Federal Reserve. Minutes from the central bank's December policy meeting revealed that policymakers expect a quote, prolonged contraction. They cited many issues weighing on the economy, including rising unemployment, falling consumer confidence and tight credit conditions. Plus, the Fed now says it's more worried about deflation or falling prices, than inflation. And so are many economists, as Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Electronics prices are down, new car prices are down. Even stock prices are a bargain. For most, that would seem to be a good thing. But in the current environment, economist Joseph Lavorgna of Deutsche Bank says it is not.
JOSEPH LAVORGNA, CHIEF U.S. ECONOMIST, DEUTSCHE BANK: Falling prices are a good thing if it's due to increases in productivity, in the ability of the economy to give you more of the things you want at a cheaper cost. If prices are falling, if we have deflation because the economy is weak, people are afraid to buy and that causes prices to decline, it could make the economy even worse.
GURVEY: To keep that from happening, the government has lowered interest rates and provided hundreds of billions of dollars to encourage lending. And there has been a hue and cry for massive amounts of direct government spending. But there is another view. Strategist Peter Schiff of Euro Pacific Capital says spending money we don't have is the problem, not the solution.
PETER SCHIFF, CHIEF GLOBAL STRATEGIST, EURO PACIFIC CAPITAL: You don't put out a fire by pouring gasoline on it; it's going to make the fire bigger. Our economy is in trouble because we borrowed and spent too much money.
GURVEY: If the Federal Reserve is worried about the long-term effects of printing all this money, it was not apparent in the minutes of its December policy making meeting. The central bank was in agreement with mainstream economists.
LAVORGNA: There is absolutely no inflation right now in this economy. The risk is clearly deflation, similar to what we've been seeing in Japan. That's what the Fed, the Treasury and the new administration are most worried about.
GURVEY: But the question remains, even if it is a minority concern at the moment, what if the massive stimulus leads to more irresponsible behavior by consumers and lenders?
SCHIFF: Every time the government stimulates the economy, they will make it worse. And then, when they make it worse, they always jump to the same conclusion -- the stimulus wasn't big enough. Let's make it bigger. And eventually, they're going to over-stimulate, which means they're going to destroy the entire economy with hyperinflation and that I think will happen if we don't change.
GURVEY: The change Schiff proposes is simple. He suggests we save rather then spend and buy only what we can afford. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
