To Stimulate or Not To Stimulate—That Is The Question (Guest Post)
Guest Post by Bryan Sayers from Forex Fraud
There is a century old debate among economists concerning how a Central Bank and government should handle a recession. In one camp, you have economists who believe that the economy should be left alone. Free markets will correct themselves, and the waste will be purged out of the economic system. When the economy recovers, it will be stronger and more formidable than ever. In the other camp, you have economists who believe a Central Bank and government should step in and stimulate economic growth during a recession by injecting liquidity into the economy. Currently, these two camps are very much at odds with one another concerning the economic recovery in the United States.
In September of 2008 when the Sub-Prime Mortgage Crisis erupted, Central Banks formed a unified economic front around the world and injected unprecedented amounts of stimulus into global markets by slashing short-term interest rates to historically low levels and bailing out large companies in danger of default. This concerted effort seemed to work. By March of 2009, the recession had bottomed out and economic growth resumed in most developed nations.
Now, two years later the economic recovery is proving to be difficult. In fact, in many western nations the economic recovery is hitting a major wall of resistance. In the United States, unemployment is remaining at stubbornly high levels, consumer sentiment is still weak, and economic growth is disappointing to say the least. Thus, economists are now split into two opposing camps concerning how the Federal Reserve and U.S. government should move forward.
The first camp of economists believes no more stimulus should be added. Deficits are already at “unsustainable” levels, and if further deficits are incurred, these economists are concerned that the investing public could lose faith in the United States government, which means bond vigilantes would make a run on the U.S. Dollar by driving up interest rates so high that the U.S. government would never be able to finance its huge debt. This would drive the U.S. government into sovereign default, which would of course cause global hysteria on a scale never before seen in modern history, especially in a forex account. These economists believe that no further stimulus measures should be taken. This process will ensure that waste is purged from the system; then, when the economy does finally emerge into strong growth, the foundation will be healthier and stronger.
The second camp of economists believes more stimulus must be injected into the economy in order to subvert a relapse into recession, which could ultimately lead the United States into a depression. These economists are often referred to as “Keynesians” after John Maynard Keynes, the renowned economist of the 20th century. Federal Reserve Chairman Ben Bernanke is a “Keynesian,” and he is dedicated to injecting as much money into the economy as is needed in order to save the United States from The Lost Decade syndrome that Japan has experienced throughout the 90′s and 00′s. This camp of economists is not as concerned with the far reaching negative effects of unprecedented levels of stimulus. Instead, they are fully preoccupied with the current economic conditions. Their stance is, let us deal with the present economic conditions, and once we are out of the woods, we will address possible future issues. They believe that tightening monetary policy prematurely is a major fiscal tragedy that must be avoided at all costs.
Each day, these two camps of economists are continually challenging each other in the financial media and in more formal settings. The truth is—the current global economic conditions are historically unprecedented. There has never been this degree of economic hardship in such a globalized economy. Only time will tell which camp is right.
