Strategic Briefing | 6.27.2011 | Debt, Austerity & Stimulus

Debt Hamstrings Recovery
The Wall Street Journal | June 27
Around the globe, the inability of governments and households to reduce their debt continues to cast a shadow over Western economies and the financial health of individuals. Today, U.S. consumers have more mortgage and credit-card debt than they did five years ago, and the U.S. budget deficit is worsening. At the same time, European governments are having to throw billions more euros at Greece to keep it afloat. The fundamental problem is that reversing the trend of piling on the debt requires some combination of cutting spending, growing income or the economy, and inflation. But wage growth is stagnant and home prices, which underpin much of the debt problem, are still falling. Meanwhile, in a vicious circle, businesses aren’t hiring or investing because they know consumers are tapped out. Banks, for their part, are hoarding cash, being stingy with new loans.

BIS Annual Report
Bank for Int’l Settlements | June 26
What about the risk that aggressive austerity measures could prove counterproductive, choking off economic growth? In advanced economies, where the recovery appears now to be self-sustaining, this risk is much smaller than it was a year ago. (In most emerging market economies, it is almost nonexistent.) But more importantly, in a number of cases the long-run fiscal outlook has not improved, at least not enough. The unavoidable conclusion is that the biggest risk is “doing too little too late” rather than “doing too much too soon”.
Consumer Spending Growth in U.S. Likely Slowed in May
Bloomberg | June 27
U.S. consumer spending probably rose in May at the slowest pace in almost a year, reflecting fewer new-car purchases and dimmer employment prospects, economists said before a report today. The projected 0.1 percent gain would be the smallest since June 2010 and follow a 0.4 percent rise the prior month, according to the median estimate of 63 economists surveyed by Bloomberg News.
The 11th hour stimulus push
CNNMoney | June 27
Recovery Act money has dried up. The Fed’s bond buying program will end this month. Economic growth remains anemic, and there are signs of further slowing. What’s a government to do? After all, the U.S. spent trillions of dollars in the wake of the financial crisis to put its thumb in the dike and get the economy back on track. Enter Senate Democrats. Harry Reid and company are starting to talk about a basket of measures they say will stimulate the economy: a payroll tax cut, a tax holiday for corporate profits held overseas and infrastructure and green energy investments.
Bachmann: White House uses “scare tactic” on debt limit
CBS News | June 26
Rep. Michele Bachmann, R-Minn., said Sunday it was not true that the U.S. government would default on its loans if the debt limit were not raised, and accused the Obama administration of using “scare tactics” to push its agenda. In an appearance on CBS’ “Face the Nation,” Bachmann, who is vying for the Republican presidential nomination, said she has “no intention” of voting for a hike to the limit, and argued that lawmakers should be focused on cutting spending rather than incurring more debt. “It isn’t true that the government would default on its debt,” Bachmann told CBS’ Bob Schieffer. “Because, very simply, the Treasury Secretary can pay the interest on the debt first, and then, from there, we have to just prioritize our spending. I have no intention of voting to raise the debt ceiling,” she emphasized.
Monetary Policy in a Balance Sheet Recession (Wonkish)
Paul Krugman’s Blog (NY Times) | June 26
I agree with David Beckworth that Richard Koo is wrong to insist that monetary policy can’t do anything in a balance sheet recession. But I think Beckworth introduces unnecessary complications; also, Koo isn’t entirely wrong. Koo’s argument is that interest rates and monetary policy don’t matter because everyone is debt-constrained. That can’t be right; if there are debtors, there must also be creditors, and the creditors must be influenced at the margin by interest rates, expected inflation, and all that.