Monday, September 6, 2010

Asia Times Online :: Asian news and current affairs

Optimists agree, Mr. Obama, cut taxes and cut spending now, so that the private sector can begin to dig itself out of the hell hole created by Investment Banking, Congress, and the current and previous Administrations.

Pessimists agree, failure to cut taxes and cut spending now will result in a prolonged recessionary cycle lasting a decade or more.

"Policy will determine how long this utterly miserable period lasts. Optimists can imagine a near-term correction in US fiscal and monetary policy, producing interest rates high enough to stem inflation's rise and a public sector deficit shrinking rapidly back to normal levels. That would allow the US capital base to rebuild while avoiding burdening the economy with excessive public sector bloat. In that case, the natural competitiveness and capability of the US workforce would reassert itself within a few years and growth would resume.

For pessimists, the Fed will keep interest rates far too low because of the recession, allowing inflation to soar and shrinking the real value of the US capital base, while mammoth public sector deficits crowd out private sector investment. In that case, apart from the very real possibility of a US Treasury default, the US downturn would intensify, as its capital endowment was hollowed out by inflation and public borrowing, while its competitiveness was reduced by a bloated public sector. We might then see a downturn lasting a decade and a reduction of 30% or even 40% in median real US wages. The US might also, like Argentina, suffer a period of hyperinflation."

Asia Times Online :: Asian news and current affairs:

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