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Washington Prepares for Economic War

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Crisis phase may be over, but it's not recovery we're facing.

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In his op-ed on Friday in the New York Times, Paul Krugman offers "deficits saved the world" from a repeat of the Great Depression. And if you couple his comment with those of Ben Bernanke out in Jackson Hole (in which he offered that the central bankers saved the world), I think the conclusion is pretty clear: Throwing money -- whether it was the Fed's or the taxpayers' -- ended the "Great Panic."

Call me a simpleton, but I've never thought of economies as having a beginning, a middle, or an end. Cycles and events, yes. But to me, economies aren't (or at least I hope they're not) finite.

So while I'll agree with both Krugman and Bernanke that the crisis phase is past, I'm not sure that what we've begun is a sustainable economic recovery as much as it is the beginning of an economic Vietnam.

I offer this thought after reading David Wessel's excellent book In Fed We Trust in which he repeatedly offers that the various actions taken by the Federal Reserve over the past two years were almost exclusively reactive to a specific event, rather than the concerted actions of a comprehensive long-term economic plan where winning the specific battle meant survival and set up the opportunity to some day win the bigger war.

In light of our lack of preparedness for the crisis, I suppose the response was necessary. But was the response sufficient to form a solid foundation for long-term US economic growth?

I'm not so sure. While survival is a necessary precondition to growth, survival in and of itself isn't sufficient. And it's here that I think we enter the economic quagmire that looms ahead.

In his Friday column, Krugman asked rhetorically, "So is there anything to worry about?" To which he responded, "Yes, but the dangers are political, not economic... Over the really long term... the US government will have big problems unless it makes some major changes."
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