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
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).
