The Gold Standard | Jackson Hope

It is now clear that stock markets have taken heart from Mr. Bernanke’s speech even though pundits proclaimed the speech to be short on specifics in terms of what Mr. Bernanke could do near-term for the US economy. But, the markets are ‘right’ in a limited sense to be happy. Long-time readers of TGS or my columns in MINT would know that I do not think that any further round of asset purchases or money printing would help the US. But, that said, which part of Mr. Bernanke’s speech that stock markets have cottoned on to? My guess is that this is the paragraph:

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment. [Full text of his speech here]

This coupled with the announcement that the next meeting has been extended to two days from one have kept stock markets drooling. In my latest MINT column, I equate this to the behaviour of druggies:

It is equivalent to a drug addict feeling happy at the prospect of his supplies being restored in the days to come. [Full column here]

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.