Can The Economy Walk On Its Own

crutches1

Just when you thought it might be OK to come out of the cave, along comes Ambrose Evans-Pritchard to throw cold water on all of the nice economic news that we’ve been enjoying.

The first line of his article sums up his view of things pretty nicely:

The most audacious monetary experiment in modern history ended on April Fools’ Day. America must walk without crutches, on gangrenous legs.

Any questions?

To be fair, he’s trying to point out that the US economy is being taken off life support as signs of life start to return. The question being whether its truly healthy enough to fend for itself. Along the way, he makes a great point about how quickly most people have forgotten just how desperate things were a short year ago:

Work by Berkeley Professor Barry Eichengreen shows that global trade, industrial output, and stock markets all crashed at a faster rate over the six terrifying months after the Lehman crisis than during the early 1930s. How quickly we forget, and how easily we are seduced by a 76pc stock rally into thinking it was a storm in a teacup. Just wait until the day fiscal retribution comes.

The question of whether it’s too early to end QE is one that can’t be answered until QE is in fact ended. Sooner or later we have to find out if the economy is indeed on a self-sustaining growth curve and now seems to be as good a time as any. As for fiscal retribution, well we went all in on spending and there’s no reversing that fact. ¬†Evans-Pritchard is right to say the atonement for this will be painful, but was there really ever any choice.

I’m of the opinion that the economy will continue to muddle forward and slowly upward. My bigger concern is that having become accustomed to unprecedented support from the Fed we find ourselves falling back into that mode the first time we run into a headwind. The Fed’s easy money is highly addictive to the political class. They won’t kick the habit easily, particularly if its absence leads to uncomfortable choices.

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