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Monday, November 05, 2012

'The Challenge Now is to Maintain Fiscal Stimuli'

Richard Koo:

Explain the disease to help US citizens, by Richard Koo, Commentary, Financial Times: .... Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. ... This is the result of the bursting of debt-financed housing bubbles, which left the private sector with huge debt overhangs ... giving it no choice but to pay down debt or increase savings, even at zero interest rates.
However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. ... With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector. ... The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. ...
...Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.
The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings... Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximizing mode. ...

I'm a bit more confident in monetary policy than he is, but to repeat what's been said here many, many times, monetary policy alone is far from enough, and more fiscal policy (e.g. spending on infrastructure) is needed to help the economy recover. It will still take time no matter what we do, there are no quick cures, but policy can still make a difference. (I know this message is repetitive, and that there's little chance of fiscal stimulus actually happening -- I'll be satisfied if Congress keeps its harmful austerity instincts under control and avoids big cuts that would further slow the recovery -- but I believe this is the right policy, and it's worth repeating now and then.)

    Posted by on Monday, November 5, 2012 at 10:43 AM in Economics, Financial System, Fiscal Policy, Monetary Policy | Permalink  Comments (64)


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