Last week, Ben Bernanke stepped into the halls of the Capitol. His goal was to explain to Congress how the American economy was facing difficult times and that more was required from the political body to stimulate the economy and to kick start the system that was slowing down. The hearing came while the Fed still has the key tool at its disposal which is to carry out asset purchase and another round of quantitative easing.
However, the solution is not to throw more money in the fire expecting something different to happen every time. It is high time now for the US economy to realise that the solution is to stop the bleeding and try a more fiscal-based solution. US stands at a precipice right now. The budget talks that had been delayed last year have come to roost. When budget talks forestalled last year, both sides of the aisle agreed that they had to make considerable ideological changes to heal the system and to make it much more sustainable in the future. Deep spending cuts and higher taxes were promised which would have decreased the deficit gap considerably and led to recovering some of the damage that had been caused throughout the Bush administration years.
Due to the damage that had taken place, US saw its credit rating drop for the first time ever in its history and now it seems standing on the same crossroads where another revision is expected in November or December. The impact of this announcement is worse this time compared to last year when there was a rebound effect in the economy that could have had offset this piece of bad news.
This time around the announcement comes on the back of worsening economic news both on domestic and international front. The worsening eurozone crisis, the lagged effect on Chinese and Indian economy and measures being taken worldwide show that action is required in the US as well. The last thing they need is more partisan bickering which only delays any progress and makes it more and more difficult for the economy to build on the work that it had till now. People look towards the Fed to solve the problem in the short run as well as in the long run.
One solution could be to take on more debt and reach the new debt ceiling but seeing the euro crisis it is not one that US would find viable. In addition to that, taking on more debt would only put the credit rating under more pressure at this delicate moment in time. One can only imagine the impact on the current economic world of a signal or further downgrading of US sovereign debt rating.
The concerns have been casting a new light recently after the IMF urged the government of US and the UK to do more in order to boost spending and investment. This is seen as a stitch in time where permanent loss and longer recession can be avoided. The IMF has raised questions over the governments’ ability to raise investor and consumer confidence in the current environment and the ability to protect against the euro crisis that is looming large. What IMF is trying to point towards is for the economies to now start building on a more sustainable model which is based on long term investment and leads to growth in the economy over time.
Fiscal budgeting has its own role to play and even though it is slow; it has more deep rooted impact on the economy. The Fed and Bank of England have performed their role throughout the financial crisis. Now there is a need for solutions which are robust and can lead to new growth in the next 2 to 3 years. Ever since the credit crunch, governments of both countries have been looking to quell one crisis after another and now it is time that a more intrinsic look is taken. The next few months are key with regards to this as they will show whether the governments of the respective countries are willing to take immediate and urgent steps to grow the economies before they start backsliding towards a deeper recession this time round.