I guess we can call this Hairofthedogonomics. Europe and the US got drunk on debt and ended up over their heads. Everyone tried borrowing more money to stimulate economic growth, promising that this time, it would create such a large amount of growth that it would cover the cost of the borrowing. As the new and inevitable second hangover kicks in and we take a look at the bill, what do world leaders want to do now?
Three guesses, and the first two don’t count:
Recession has taken hold in parts of Europe, and the euro zone’s stubborn crisis risks a worldwide shock. Growth is slowing in major developing nations, and the U.S. economy may be faltering.
When world leaders take stock at a summit next week in Mexico, they’ll face the discomforting fact that four years of crisis-fighting, trillions of dollars in government stimulus spending and a massive effort from the world’s central banks have failed to produce the “strong, sustainable and balanced” world economy they are striving to build.
And you have to love the question that comes next — and its answer:
Is it time to open the cash spigot again?
“That would be highly due,” said George Pagoulatos, an economics professor who has watched this battered Mediterranean country cut wages in hopes of making its exports more competitive — only to find its major trading partners facing problems of their own. “There is no global demand and no demand in the euro zone,” a situation that leaves Greece with a worsening recession and no clear path to renewed growth.
Investors may be banking on policy action. On Tuesday, U.S. markets gained on speculation of a coming stimulus measure from the Federal Reserve after next week’s Fed policy meeting and after the European Central Bank endorsed a plan to guarantee bank deposits, Bloomberg reported.
Of course it’s time to borrow wildly again … in an attempt to reverse a debt crisis. Hey, as any gambler at the track can tell you, the best way to pay off Vinny The Nose is to get more cash from a loan shark and bet on the long shot in the eight race. This time, our
horse economy will make it to the finish line instead of the glue factory!
The good news? There is exactly zero chance that Congress will hand Barack Obama another blank check this summer. First, House Republicans are adamantly opposed to further stimulus spending; second, Senate Democrats won’t even bother passing a budget for normal spending, let alone extraordinary spending. Obama could use that as political fodder in the upcoming campaign by blaming the economic slide on the lack of a second stimulus package, but Obama’s spent the last three years claiming that his first economic stimulus package has already saved the private-sector economy. “The private sector is doing fine,” Obama assured everyone last week, and so that makes it difficult to argue for Hairofthedogonomics.
The only way to get over the hangover is to stop drinking. Fortunately, we are in position in November to take the first step of a 12,000-step program for the US to dry out on debt and deficit spending.