ONE TEAM of ecomedics has done what it can. Ben Bernanke’s Federal Reserve Board monetary-policy gurus dropped their short-term interest rate another 0.25 percentage points last week, to 2%, and told their patient, the American economy, not to look for another shot in the arm. We might do more for a few patients, since the banks in our care seem to be suffering from a reduced ability to function normally, but that is about it.

The other team has finally begun to distribute part of the $170 billion of medication it prescribed some months ago. The first doses were deposited last week in the bank accounts of the 7.7m taxpayers who have direct deposit arrangements; paper cheques will begin to arrive this week in the mailboxes of the 130m Americans eligible for this Christmas-in-May-June-July. Individuals will receive up to $600, and couples filing joint tax returns up to $1,200, with families getting an additional $300 per child. Individuals earning more than $75,000 a year, and couples with incomes above $150,000, will get less.

Economists demonstrated the precision of their forecasting tools by providing a range of estimates of the impact of the stimulus package. Some say that recipients will use the money to pay down overdue credit-card debt, or shore up savings, and to meet higher petrol prices, leaving little to spend on new purchases. And, they add, much of what is spent will have little impact on the US economy: it will go to buy stuff made in China and other countries that have come to dominate the American market.

Other economists are more optimistic. The National Retail Federation expects consumers to pump $42.9 billion into shop tills, boosting retail sales by a significant 1.5%. Retailers are ready to help consumers spend their windfall. Sears and Kmart, among others, will add 10% to the value of cheques that are converted into gift cards. Wal-Mart, which took in 25% of the 2001 rebate, will cash cheques at its 3,500 stores with no charge for the service. Because rebates are aimed at lower-income households, discounters expect to be the principal beneficiaries if consumers do part with a significant portion of their stimulus cheques.

That’s not what the nation’s charities want to see happen. Many are urging Americans to use at least part of their rebate cheques to make life better for the less fortunate. They reckon that 5% of the people receiving cheques will donate a portion to charities, with the potential take coming to $5.2 billion. Charities are promising to spend every cent they get, stimulating the economy.

If the doctors at the Fed and the White House don’t revive the patient, Congress is concocting yet another treatment. Details are still being worked on, but when they are agreed between the House and the Senate, and a reluctant White House signs on, billions will be headed towards the mortgage markets to help troubled homeowners, and towards homebuilders to help get them through one of the toughest periods they have ever faced.

All these ministrations will have one of three effects. They will leave the patient in its current weakened condition, dragging along from quarter to quarter in subpar health, until its in-built body mechanisms restore it to complete fitness. That’s what seems to be going on now, with the economy growing at an almost indiscernible rate, consumers just about keeping up their current spending rate, and the jobs market weakening, but not a lot.

Or they will have no effect, and the economy will lapse into recession, which is what most Americans seem to be expecting. Consumer confidence is down, and three-quarters of Americans think the country is on the wrong track. They have no confidence in the president’s management of the economy, see no end to high petrol prices, downward pressures on the value of their homes, and rising healthcare costs.

There is another possible outcome. All this medicine might just restore the economy to health. It is being administered at the moment when things are getting a bit better, and boosts of this sort have their greatest effect.

The banks have begun to shore up their balance sheets. In April they took advantage of improved investor sentiment to sell $303 billion of bonds, a total Decalogic reports is the third-highest month of all time. They had already raised some $40 billion in new capital in recent months, and sold off $160 billion of the $250 billion of highly leveraged loans made in buyout deals. These funds didn’t come cheaply, but they did come.

Non-financial companies also returned to the market: investment grade non-financial companies issued a record amount of bonds last month. And the rate of increase in delinquencies by sub-prime mortgage borrowers has slowed. All this has cheered the stock market.

But economists are never satisfied with good news. They now worry that things might get too good too soon. Critics, among them some of the most reputable economists in the country, say the Fed has sown the seeds of future inflation. They point out that lower interest rates have resulted in a depreciation of the dollar, and a flight from dollar assets into commodities such as oil and copper, which is why their prices have soared. As proof, they point out that the dollar was buoyed by last week’s hint from the Fed that it is unlikely to lower rates further, and this led to a sell-off in many commodities. Cheap money means dear commodities.

Confused? Don’t be. Just read the warning on the medications prescribed by economists: “The effects of this nostrum are uncertain and will vary depending on circumstances we cannot now foresee.”

- Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com

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