Here’s an interesting perspective on America’s current predicament from The Economist…
The main reason why a new round of quantitative easing from the Fed could fail is that supporting short-term stimulus has become political suicide, even though it means little relative to America’s long-term debt problem.
Meanwhile, actually trying to fix America’s long-term debt problem is likely political suicide as well. This makes voter opposition to spending less than constructive since it pushes politicians to prevent stimulus now, yet not fix the real spending problems, ie. the long-term ones, for the future:
Rather than rely on Mr Bernanke alone, politicians should complement QE2 with more short-term fiscal stimulus. The first stimulus is now expiring and much of its contribution was canceled out by the shrinking of state and local-government budgets. A new fiscal boost combined with targeted structural measures—encouraging banks to write down mortgage principal, for instance, so that homeowners with underwater mortgages can move house to look for work—would bring unemployment down faster. Yet Congress is reluctant to act because increasing the deficit is politically toxic.
Americans are right that government debt is a serious long-term problem. But growth is a serious short-term problem. The two can be addressed simultaneously, by adopting a credible medium-term deficit-reduction plan of the sort that Britain’s government has announced. Doing that will take courage, for it means coming up with a scheme for cutting entitlements to pensions and health care that will not go down well with voters. But if ever there were a moment for courage, this is it.
Of course there’s the view that fiscal stimulus is a waste of money right now… and, yes, this could be the case.
But if this view proves wrong, and stimulus is actually needed, we could easily end up with a situation whereby American voters shoot themselves in the foot by preventing stimulus and thus allowing themselves to fall back into recession. That would certainly be a shame.
So let’s truly hope that further fiscal stimulus is indeed unnecessary right now… because the U.S. probably won’t be getting any.
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