Photo: Alessandro Reginato
The latest piece from John Mauldin contains a nugget on US fiscal policy that’s worth addressing:The economy is getting weaker. What can we do? The short answer is, sadly, not much. There were some in Maine who argued for more fiscal stimulus, but I think there is little political will for another major stimulus program. The last one got us up to 3% GDP growth before we fell back, and all we got was a major debt bill and a higher level of government spending. I fully get that lowering government spending will have negative short-term effects, but we are at the point in the Endgame where we must bite the bullet.
This is what we keep being told by everyone — Reinhart & Rogoff, the crew at S&P, politicians, etc. — “we must bite the bullet.”
While it’s certainly true that politically there’s no appetite for further stimulus now, economically there’s just no support for this argument. 10-year Treasuries ended the week at 2.125%, historic lows. The world is screaming for more US government debt. And with the US getting older, the domestic demand for savings vehicles (like Treasuries) is only going to grow. The big problem right now, in fact, is the shortage of credit vehicles for savers, especially as the securitization industry has collapsed.
And we’ll come back, once again, to one of our favourite charts from Japan, which shows that periods of spending cuts caused higher, not lower deficits, undermining the entire point of the cuts.
Photo: Richard Koo
And Japan hasn’t been unique on this front. Have you checked out how austerity is going from a deficit standpoint in Portugal, Greece, or the UK lately?
So it’s fine to argue for less spending, or acknowledge today’s political realities. But at least from an economic standpoint, there’s no indication that our financial situation is getting so dire that our lenders are about to cut us off. On the contrary, they seem more and more willing to lend to us every day.