This will not surprise anyone who is familiar with Richard Koo and his work on balance sheet recessions, and his exhortations to use government deficits to balance out a deleveraging economy, but just in case… the Nomura economist is pretty dismayed by what he’s seeing in DC right now.
We’re just gonna give you a chunk of his latest note:
US debt ceiling problems are manufactured crisis
Headlines in the US continue to be dominated by the debt ceiling crisis. In reality, the crisis comprises two separate issues that have been grouped together for political reasons.
Congress can raise the debt ceiling any time it wants and has done so many times in the past.
This time, however, the Republicans have used the debt ceiling as a bargaining chip in an attempt to force the Obama administration to cut the deficit by scaling back government spending. A similar attempt was made in 1995.
In that sense, the political turmoil engulfing Washington in recent weeks is a manufactured crisis—there is really no problem in financing the budget deficit, but the Republicans control the House of Representatives and are effectively holding the debt ceiling hostage.
Would default be acceptable if it helped reduce deficit?
However, some Republicans are now saying that a sovereign default would be good for the US, if it forced the Democrats to make concessions on the issue of deficit reduction, and that has caused some concern.
In other words, they have convinced themselves that the markets would welcome a default, if it resulted in an even more meaningful cut in the deficit.
In the words of former National Economic Council Director Larry Summers, this is like allowing children to play with fireworks in a powder keg: it is extremely dangerous.
Spending cuts worst possible economic policy
Even more depressing is the fact that the spending cuts and other deficit-reduction efforts sought by the Republicans are the worst possible economic option for the US today. This is because government borrowing and spending is the only way to prop up the economy when the private sector is deleveraging at a time of zero interest rates.