Rep. Paul Ryan (R-WI) against $600 billion cash infusion by Federal Reserve

Rep. Paul Ryan (R-WI) joined his voice to the chorus of opposition to the plan concocted by the Federal Reserve to infuse the economy with $600 billion in cash to lower long-term interest rates and increase consumer spending.  The plan, although well received by a number of prominent economists, has been the subject of intense criticism by fiscal conservatives, including Ryan, heads of foreign countries, and politicians from both sides of the aisle.

Ryan vs. Bernanke

Ryan, who in January will assume the position of chairman of the powerful House Budget Committee, came out on the attack against this proposed plan, citing long-term negative consequences to the economy.  Representing Wisconsin’s 1st Congressional District since 1999, Ryan’s constituents have been battered by higher than average unemployment rates.  The district, which encompasses all of Kenosha and Racine Counties, most of Walworth County, and parts of Rock, Waukesha, and Milwaukee Counties, has an unemployment rate of 8.2% compared with 7.3% for the state of Wisconsin.

It is with the high national unemployment in mind which motivated the Federal Reserve to pursue this plan.  The Fed believes that by purchasing $600 billion worth of Treasury securities over the next eight months that the long-term interest rates will go down even further, thus prompting consumers to borrow more.  Increased borrowing, it is hoped, will lead to consumer spending on automobiles, real estate, and other big ticket items.  Additionally, by reducing the long-term interest rates, the Fed also envisions increased hiring, expansion, and purchasing of new equipment by businesses.

As published on JSOnline, Ben Bernanke, Federal Reserve Chairman, said, “Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10%, a large number of people can find only part-time work, and a substantial fraction of the unemployed has been out of work six months or longer.”  By infusing such a tremendous amount of cash into the economy, it is his hoped that lending will increase and spending will ensue, therefore helping to alleviate what ails the sluggish economy.  Bernanke, who was appointed to his current post by President George W. Bush in February 2006, was recently confirmed for a second four-year term by a 70-30 vote in the United States Senate in January 2010.

Risk of inflation

Ryan strongly opposes this plan for one primary reason: inflation.  Inflation, which causes money to decrease in value and shrinks the purchasing power of a currency, has been an outspoken proponent of the importance of a stable currency (please see video) and has taken up this cause.  As published on JSOnline, Ryan commented, “Inflation is a killer of wealth.  It wipes out the middle class.  It eviscerates the standard of living for people who have retired or are living on fixed incomes.  Name me a nation in history that has prospered by devaluing its currency.”

The infusion of so much cash into the economy, it is feared, will weaken the value of the dollar, thereby driving up inflation over time.  One benefit of a weak dollar in the short-term is the fact that exports from the United States become cheaper, thereby making them more appealing to overseas customers.  Conversely, the value of imports to the United States become that much more expensive, and in an uncertain economy with high unemployment and low consumer confidence, high prices on anything generally result in an inability to move product.  This sets up an unfair trading advantage for the United States, something that foreign countries have spoken up against.

Disgruntled foreign nations

China and Germany, which make up the world’s largest export economies, respectively, stand to lose out big if the Federal Reserve moves ahead with this plan.  As published on JSOnline, Wolfgang Schaeuble, German Finance Minister, said, “With all due respect, U.S. policy is clueless.  The American growth model…is in a deep crisis.  The U.S. lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies.”

Ryan, for his part, acknowledges the short-term economic gain that could be realized by this plan but doubts its effectiveness over the long-haul.  As published on JSOnline, Ryan commented, “I won’t dispute that a cheaper dollar can help boost exports in the short-term.  But I don’t think it’s a good tradeoff to do so at the expense of inflation.”

Although the value of the dollar has decreased in recent months, the overall rate of inflation by decade has subsided as of late.  In fact, the ten-year span between 2000 and 2010 displayed the lowest recorded rate of inflation since the 1960’s, according to Dollar Times Inflation Calculator.  By decade, the rate of inflation has been:

1950 – 1960        2.22%

1960 – 1970        2.52%

1970 – 1980        7.36%

1980 – 1990        5.10%

1990 – 2000        2.93%

2000 – 2010        2.52%