The failure of the so-called supercommittee’s economic implications have very little to do with U.S. sovereign debt. We don’t have an immediate debt crisis, as is happening in Eurozone countries. America can borrow in its own currency, a huge advantage, and the dollar is the world’s reserve currency. With historic low interest rates, we can also borrow very cheaply. The crises we do face: Unemployment, slow growth, state fiscal problems and the huge demand hole left by the Great Recession.
Draconian spending cuts is the last thing we should be doing. This nearly guarantees a double-dip recession and pain for millions of average Americans. While the “failure” seems to portend such cuts, they were already the mandate of the committee. President Obama was on board from the beginning, buying into the Robert Rubin/Larry Summers wing of his party on austerity (which is doing such a great job of wrecking the U.K. economy right now).
As is well known, FDR throttled back government spending in 1937, seeking to balance the budget. The result: Severe recession. Been there, done that. So if there was no serious economic (as opposed to political) argument to be made for cutbacks, why did the market react so badly yesterday?
Part of the reaction was driven not by Washington but Beijing. Over the weekend, according to Financial Times, Wang Qishan, the Chinese vice-premier who oversees the financial sector, gave an incredibly bearish assessment. “Right now the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time.”
Beyond that, events in D.C. show a paralyzed federal government. It’s not going to do anything to help the economic crisis, and may do much to hurt it with wrongheaded austerity.
And Don’t Miss: Two steps toward tackling the student loan problem || Rortybomb
Today’s Econ Haiku:
The pain in Spain’s fall
Mainly means more contagion
I think we’ve got it!