There seems to be a difference of 'opinion' on the 'proper' monetary policy that should be currently implemented across countries. On one side, you have the United States and the UK who believe further stimulus spending mixed with current (not increasing) tax rates and swelling sovereign debt is the right choice. On the other side, there is the ECB and the IMF as well as other European finance ministries who are 'declerating' a stance of fiscal tightening and raising of taxes.
It reminds me of a parent saying, "you can't tell me how to raise my children!"
The U.S. and UK, who are governed by the U.S. Federal Reserve and the Bank of England, have mentioned a return to stronger stimulus after disappointing economic data in each country. Fed Chairman Ben Bernanke said on Wednesday (July 21) that he stood to ease monetary policy further if the U.S. recovery withers. He described the outlook as "unusually uncertain." In the UK, the Bank of England also discussed easing policy this month, for the first time since February, reflecting growing concerns about UK economic prospects.
For the ECB and IMF, there stance is stated: 'Industrialized countries must instigate plans to cut public spending and raise taxes immediately in order to consolidate the present recovery.'
In essence, if the UK or the U.S. were to need emergency funding the ECB and IMF , they would be unable to help them. You're f*cked, is what they'd say. It is important to have two sides of an argument, and the ECB's and IMF's are extremely justifiable. The ECB chairman also stated how budget cuts are more effective than tax cuts. I think everyone will agree that the effectiveness of budget cuts are seen much sooner than tax cuts, but is it the right choice?
One very important thing that the U.S. is dealing with is the hellish housing market. So if we cut budgets, we lay off government employees, who then apply for unemployment, who then apply for the government subsidized home loan modification program. I'm not sure if that works!!
Yah this is dead on. The original stimulus did not address the structural challenges we face in the economy, instead, it was just pork barrel spending. Pulling the plug on stimulus now would be devastating for the economy. State budgets would crash, housing prices would fall, and people would stop spending. The US (and all other countries) need to keep the illusion alive. We don't have the political will to add stimulus, nor take it away, so that might be good for us in the long run. In Europe, the political will actually exists to withdraw stimulus and slash budgets. Even right wing market observers, like Dennis Gartman, think that Europe is making a mistake in withdrawing its fiscal stimulus. Anyone who reads him knows how libertarian he is, so it just goes to show how necessary it is to not slash budgets and raise taxes right now.
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