Sweet memories don't fade faster than the bitter ones.
The question is, whether to default or not to default?
And the answer is, nep.
Can’t blame the Obama administration either can we? They almost inherited a battered, shattered economy with burning issues left for fiscal fantasies. But it seems that they have forgotten J.M. Keynes! Attempting conspicuously to raise the debt ceiling is neither is a good option nor the only fair policy choice. The fiscal fissures left behind by the Republicans bore fruit as their business of corporate bailouts turned out to be lender of last resort’s (Fed Reserve’s) nightmare. Now left with but few policy choices, their primary objective is to deal anyhow and in anyway to avert a default on sovereign debt. Any sweeping budget agreement to reduce deficits by overhauling tax base seems improbable, given that Republicans are up in arms against such initiatives.
But it’s not the Republicans who are to be blamed. They are as patriotic as the Democrats. They all work for a better future, for a better tommorrow. They did what was required, only did they ever undermine the overstimulation of the economy that led to over-borrowing.
However again, Keynes may have some answer. Even if a tax re-write to generate new revenues and channelize those into productive economic growth would in certain, expand the tax-base and create new jobs, raising new money in the old economy seems to be the real problem for the Democrats. What America needs is quality spending since; spending must have some utility or social value.
Although Bush era tax breaks to affluent is to end by 2012, it would be too late altogether for the Democrats. And, how long do you think holding down interest rates to allow cheap borrowing may pursue such goals? Any default on debt will invariably raise borrowing costs (that’s the cost of a default) and that would require to be cushioned through quantitative easing policies.
But this time, the Fed should try a new aspect-qualitative easing against quantitative easing.
Fed Chairman, Dr. Bernanke would be in much more demand in those times again. Can’t blame him either can we? Like Obama, he inherited the Chairmanship of the Fed Reserve following the legacy of Greenspan. And it all started with him soon after. Suppose that the US defaults on domestic and sovereign debts that would invariably cast shadow on the attractiveness of the long-term US Treasury debt papers. For a few years, the 33 Liberty street near the Fed Bank would be deserted almost.
Well, that would cut Mr. Bernanke’s frustration and he can rather buy some quality time. But that’s not a good way out. Macroeconomic structural imbalances should be solved and vigorous stimulation of the domestic economy would be required. In those atmosphere, it may turn out that, to surprise, USA may be growing at a rate of 8.5% again!! That happened during the 1980’s. That can happen now. Americans have a fair history of turnarounds similar to Japan, and this is their last chance perhaps.
Suppose that, if growth returns with full vigor in the USA, bad days for China and their heap of cheap stuffs. But before that happens, and by default, Beijing-Washington debt standoff may be the real factor of gunship diplomacy.
And in those days, it may well sound like the tale of two economies with two currencies- a rising dollar, and a falling renminbi. And that wouldn’t matter much! Even a wildly depreciating renminbi wouldn’t be enough to attract Chinese goods into the US shore.
A contrarian view isn’t it? Well so, what options do really remain for the Democrats?
1. First, extending maturities on bonds set to expire (seems unlikely, but probable)
2. To avoid being marked as a defaulter and lose credit status, privatization as a long-term remedy for the economy (few takers)
3. Package for austerity measures similar to Greece (people would be on the streets)
4. Involve the private sector through large scale private-public partnerships for growth oriented policies and large-scale investments in railways, highways etc. (to create jobs)- (not seemingly a better idea for the Republicans)
5. Selling and issuing more debt (raising debt ceiling-not just only one option)
6. Let China buy more Treasury bonds (not a bad choice-but may lose some fiscal sovereignty this time)
7. New tax levies on banks and investment houses
8. Re-in sourcing jobs by reinsuring new employment
9. Filling tax-loopholes would invariably fill-up fiscal fissures
10. Reorganize defense spending, enough has been done, and off certain, quite important for the long run,
11. Don’t mess-up with the Medicaid.
12. Renegotiate international trade treaties and let the closed economies open up a bit further
13. Don’t just hope for the best; rather toil firm for the best!
14. And don’t let Fed buy up all the treasury debts again
15. Invest in R&D, education, reignite American Dreams*
*(Most important)
These measures would in time, invariably alleviate the long-term deficit problem of the US. Mamas will sing and dance with Billy Joel’s River of Dreams, not to wake up at night and fear about tomorrow. And here again, Keynes is the king, as those were so fair times!
Sources: IHT.
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