Though inflation has yet to rear its ugly head, the risk is imminent, given the scale of the stimulus and our questionable ability to unwind it at the proper time. On that point, while some of the Fed's emergency liquidity programs are already being phased out or extinguished given the lack of demand without any discernable market impact, the deep threat remains a move to actually raise borrowing rates or sell assets in the still-fragile open market. Given how the economy has become ever more highly leveraged to interest rate changes over the last 30 years, the Fed may quickly find a choke point once it begins to tighten interest rates, potentially creating a premature pause in restrictive policy in order to avert another recession. Thus, the Fed is likely to miss the exit window and reflate the economy all over again, allowing debt burdens to increase further and setting the stage for another asset bubble burst in the future.
Betwixt and between, stuck between a rock and a hard place, no matter how you say it, the U.S. economy is under a dark cloud of uncertainty. For this reason, and for the first time in modern history, it is becoming clear that the U.S. economy will no longer function as the prime engine for global growth. We will not be alone, as other key industrial economies facing the same hurdles will collectively lag the major developing nations as well.
Consequently, it would seem that one of the lasting legacies of this recession and our tenuous exit strategy will be a realignment of global economic influence with the BRICs and other developing countries that previously had little systemic influence. These economies have seen minimal lasting impact from the global economic downturn and are already growing at a rapid pace, in many cases with limited intervention and stimulus support. Unburdened by the mistakes of the past, their huge populations are shifting from poverty to global consumption; over time, they will increasingly trade among themselves and rely less on exports to developed countries, thus securing their dominance. One of the few limitations of the BRICs' potential is the weakness of their infrastructure, but this problem is ever-diminishing as global dollars and expertise pour into their systems.
There is little the U.S. can do about the hand we have been dealt, as we see the reality that this recession, underwritten by out-of-control stimulus measures from downturns past, will seal our fate.
Michelle Knight is the Director of Fixed Income at Silver Bridge (www.silverbridgeadvisors.com), an independent wealth management boutique. All investment advisory services are provided by Silver Bridge Capital Management, LLC, a registered investment advisor affiliated with Silver Bridge Advisors, LLC. None of the information contained in this piece is intended as investment advice or securities recommendations to any person.