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Folha, Brazil

U.S. Conservatives Threaten to Plunge U.S. into 'Lost Decade'

 

"It will be very difficult to convince Republicans that the government needs to continue spending on fiscal stimulus programs … but if conservatives manage to end the fiscal stimulus now while the private sector is still in a debt relief phase, the economy will start to begin to slow again."

 

-- Richard Koo, chief economist at Japan's Nomura Research Institute

 

Patricia Campos Mello*

                                         

 

Translated By Cristiane Teston

 

June 24, 2011

 

Brazil - Folha - Original Article (Portuguese)

Republicans and Democrats are arm wrestling over the huge American budget deficit, which is currently at $1.6 trillion.

 

Treasury Secretary Tim Geithner warned that the United States could be forced to default on some of its obligations if the Republicans don't agree to raise the U.S. debt ceiling (currently $14.3 trillion) by August 2.

 

The Republicans, in turn, are unwilling to make concessions. To approve the raising of the debt ceiling, they demand deep spending cuts setting the deficit on a downward trend. They refuse to allow a rise in taxes to raise government revenue.

 

 

"We've already identified trillions on possible spending cuts," said Eric Cantor, leader of the Republican majority in the House, when he announced he was pulling out of budget talks. "The Democrats continue to insist that any agreement must include tax increases, but there is no support for this from Republicans." [Translated quote].

 

Democrats, however, are opposed to drastic cuts in government spending right now.

 

They propose to cut the deficit over the medium term, but maintain the fiscal stimulus in the short term. According to them, cutting spending now will undermine the U.S. recovery, plunging the U.S. into a "double-dip" recession.

 

Last week I spoke to Richard Koo [video below], chief economist at the Nomura Research Institute, the research of the Nomura brokerage house. Mr. Koo is considered one of the world's foremost experts on so-called "balance sheet recessions," in which there must be "debt relief" for consumers and businesses.

 

 

For Koo, just like Japan in the 1990s, the United States is suffering from a recession imbalance of “balance sheets.” These types of recessions are rare, occurring only once about every 70 years. It results from the bursting of an asset bubble (real estate, in the case of the U.S.). After the bubble bursts, the private sector wants to rid itself of the debt that accumulated during the period of euphoria. Therefore, reducing interest rates doesn't help, because consumers don't want to borrow more, but would rather pay down on the debts they already have (see liquidity trap in Japan's "lost decade"). Given that monetary policy is ineffective, the government is required to enter the game with fiscal stimulus packages, replacing private sector demand that has yet to recover.  

Posted by WORLDMEETS.US

 

That's what the U.S. has been doing. Since Barack Obama became president, the government has pumped $1.2 trillion in fiscal stimulus into the economy. Furthermore, in terms of monetary policy, the FED (the U.S. central bank) cut interest rates to zero, and through program of quantitative easing (QE1 and QE2), injected $2.3 trillion into the economy by buying U.S. Treasury bonds.

 

The danger, Koo warns, is to suspend the medication too early. Republicans and conservatives are mounting an open campaign to cut government spending now.

 

The U.S. runs the risk of repeating the mistakes of Japan and plunging into a lost decade, just like the Japanese economy did in the 1990s, Mr. Koo warns.

 

"What we need now is a continuation of the fiscal stimulus programs and tax incentives, in which the government borrows and spends on public works, for example, by replacing the demand that the private sector isn't leading," says Koo, who is visiting Brazil next week to give a lecture about what the U.S. can learn from the Japanese recession of the 1990s.

 

"It will be very difficult to convince Republicans that the government needs to continue spending on fiscal stimulus programs, because they want to start cutting costs and reducing the deficit now. But if the conservatives manage to end the fiscal stimulus now while the private sector is still in a debt relief phase, the economy will start to begin to slow again."

 

Mr. Koo recalls that for the Japanese, it took 15 years to get out of the "balance sheet recession" in the 90s because they, "prematurely suspended the needed medicine."

 

Patricia Campos Mello is a reporter that writes about politics and international economy for Folha. She was Washington correspondent for four years, during which she covered the election of President Barack Obama, the financial crisis and the war in Afghanistan, accompanying American forces. She has a Masters Degree in Economics and Journalism from New York University and is author of the books, O Mundo Tem Medo da China (The World is Afraid of China, Mostarda, 2005) and Índia - da Miséria à Potência (India - from Poverty to Power, Planeta, 2008).

 

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[Posted by WORLDMEETS.US June 30, 2:51pm]

 







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