GUEST BLOG by Vincenzo Desroches
When The Great Recession of 2008 exploded in September of ’08, Central Bank and government leaders from around the world held emergency meetings on how to save the global economy, and in an unprecedented act of cohesive unity, financial leaders around the world slashed short-term interest rates to historically low levels in an attempt to loosen credit markets and prop up a failing global economy.
Common monetary theory says that during a recession, private demand dries up as consumer and businesses cut back on spending. This decreased demand in the private sector can serve to destroy an economy; thus, a government will generally loosen monetary policy in the form of some combination of lower interest rates, tax cuts, or government spending This helps stimulate the economy back into growth mode; then, as economic growth resumes, private demand will again increase and monetary stimulus can be removed gradually from the system.
On February 11, 2009 Congress enacted the $787 billion American Recovery and Reinvestment Act. The bill was intensely resisted by Republicans as they cited that the bill’s pricetag and passage was a sign of President Obama’s desire for big government and a sign that he would increase the U.S. deficit without regard to the future costs to America. The effectiveness of the Stimulus Package has been a central debate between politicians and monetary experts over the last 8 months.
Currently, the United States economic recovery is faltering. Unemployment is high and economic growth is stagnating. This combination can be deadly and has led countries like Japan into extended periods of deflation. In late July, Federal Reserve Chairman Ben Bernanke said the economic outlook in the U.S. is “unusually uncertain.” This lack of clarity out of the Federal Reserve has caused global investors to become very worried concerning the economic future of the global economy and their forex trading strategy.
There is essentially a battle raging among the most powerful economic leaders in the world. On one side of the argument we have Ben Bernanke saying he will stimulate the U.S. economy by instituting another round of quantitative easing measures and the U.S. government may enact another round of stimulus measures. On other side of the argument you have European Central Bank President Jean-Claude Trichet who is arguing that countries should not run up budget deficits, but they should instead enact fiscal austerity measures and reign in government spending.
Anyone who says there is absolute yes or no correct answer to this problem is unwilling to look objectively at the facts. The truth is—no one knows for sure what the best path is. No recession has ever been like this one. We are dealing with a very complex global economy, and evidence that there is no clear yes or no answer to this very complex problem can be seen in the fact that the best and brightest and most educated financial world leaders and economists are split on the issue. The truth is that there are strong, valid arguments on both sides.
Opponents of further stimulus measures are concerned about a few things. First of all, the size of government has increased dramatically as a result of public spending. This has conservatives very concerned. How will the U.S. be able to pay off these huge, unsustainable debts? And what if debt markets become concerned with the size of the U.S. deficit and begin demanding higher interest rates? Also, where is the hard evidence that the first round of stimulus measures has actually helped job creation?
These questions are causing many critics to stand in opposition to further stimulus measures. The passage of another round of stimulus will heavily depend on the fall elections. Another round of stimulus measures may be unlikely if republicans gain much of a footing in Washington as a result of fall elections.
Written by Vincenzo Desroches working with Forex Trading