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  • Title: Kalzac.net -
    Descriptive info: .. Kalzac.. net.. Home.. All Things.. Global View.. Inside Track.. Contact.. Privacy.. Search.. Eurozone Troubles and the US Deficit.. Posted on.. March 10, 2013.. by.. Admin.. A new US based poll suggests that swing voters in the US, who re essential to the fate from the Democratic Party, care most about three things: reigniting the economy, reducing the deficit and creating jobs.. However the latter two goals are usually incompatible, especially during major recessions.. In times of high unemployment, government deficits are required to underwrite growth, considering that the private sector shift to non-government surpluses leaves a huge spending gap and corporations responded to the failing sales by reducing production.. Employment falls and unemployment rises.. Then investment growth declines since the pessimism spreads.. Before too much time you have a recession.. Without any discretionary change in fiscal policy (now referred to within the public media as “stimulus packages”) the government balance will head towards and frequently into deficit, unless the US miraculously becomes an export powerhouse along emerging Asia lines, and runs persistent current account surpluses, to some degree that allows the governments to operate budget surpluses.. Once again to occur, particularly when the largest current account surplus nations, notably Germany, hang on to a mercantilist export led growth model, an unavoidable results of that country’s aversion to increased government deficit spending.. The German government’s reticence to counter any kind of shift in regard to the current account surplus is particularly significant in light of the continuing and intensifying strains developing in the EMU nations (see here).. Last week’s Greek “rescue” is Europe’s “Bear Stearns event”.. The Lehman moment has yet to come.. One possible outcome of this might very well be significantly larger budget deficits in america along with a substantial increase in America’s external deficit, given the unlikelihood of America becoming an export super power again.. Allow me to elaborate below.. Within the euro zone, Now i see 1 of 2 possible outcomes.. Scenario 1: the problem of Greece isn t contained, and the contagion effect reaches another “PIIGS” countries, leading to a cascade of defaults and corresponding devaluations as countries exit the EMU.. Interestingly enough, the country that could well be affected most adversely in this situation is France, as the country’s industrial base competes largely against countries like Italy and the corresponding competitive devaluation of the Italian currency in the event of a euro zone break-up could well destroy the French economy (by comparison, like a capital goods exporter with few euro zone competitors, Germany’s industrial base will be less adversely affected in our view).. In Scenario 2 (more likely for me) we get some greater fears about other PIIGS nations (discussion has become embracing Spain, Portugal and Ireland).. The EMU might well hold together however the corresponding fear of contagion could provoke capital flight and drive the euro down to parity (or lower) using the dollar.. Obviously, the euro’s weakness creates other problems: when the euro was strengthening last year because of portfolio shifts from the dollar, a lot of those buyers of euro bought euro denominated national government paper (including Greece).. The resultant portfolio shifts helped fund the nation s EMU governments at lower rates during that period.. That portfolio shifting has largely come to an end, making national government funding inside the euro zone more problematic, because the Greek situation now illustrates.. The weakening euro and rising oil prices raises the chance of ‘inflation’ flooding in with the import and export channels.. With a weak economy and national government credit history particularly sensitive to rising rates  ...   scenario we ve sketched out).. Let s assume that the united states doesn t wish to sustain further job losses, the budget deficit will in the end deteriorate further, either “virtuously” (via proactive government spending which promotes a complete employment policy), or perhaps in a poor way , whereby a contracting economy and rising unemployment, produce larger deficits via the automatic stabilisers moving to shore up demand because the economy falters.. How large can these deficits go? Easily to around 10-12% of GDP or more (in comparison to the current 8% of GDP) should a euro devaluation constitute an adequate magnitude to induce a clear, crisp deterioration of America’s trade deficit.. Possibly even higher.. What will function as the response from the Obama Administration? America can sustain economic growth having a private domestic surplus and government surplus when the external surplus is big enough.. So a rise strategy can still be consistent with a public surplus.. But this becomes virtually impossible when the euro zone’s problems continue, once we suspect that they ll.. President Obama, however, has long decried our “out of control” government spending.. He clearly gets this nonsense in the manic deficit terrorists who don t understand these accounting relationships that we’ve sketched out.. Consequently he is constantly on the advocate that the government leads the charge by introducing austerity packages just once the state of private demand continues to be stagnant or fragile.. By perpetuating these myths, then, obama himself becomes part of the problem.. He ought to be using his position of influence, and the considerable powers of oratory, to alter public perceptions and explain why these deficits are not only necessary, but highly desirable in terms of sustaining a complete employment economy.. Governments that issue debt in their own currency and don t promise to convert their currency into anything else can always “afford” to run deficits.. Indeed, within this context government spending financially helps the non-public sector by injecting cash flows, providing liquid assets and raising the net price of some or all private economic agents.. As opposed to today’s budget deficit “Chicken Littles”, we maintain that talking about government budget deficits so far as the attention can easily see is ludicrous for the simple reason why because the economy recovers, tax revenue rises, the deficit automatically reduces.. That’s the entire reason behind engaging in deficit spending in the first place.. Any projections that demonstrate the deficit continuing to climb without limit is misguided the Pete Peterson projections, for example, won t ever happen.. As we near and exceed full employment, inflation will pick-up, which reduces transfer payments and increases tax revenues, automatically pushing the budget toward surpluses.. Within the 220 year experience of the United States there have only been a couple of years when we’ve not had deficits and each time the surpluses were immediately then a depression or a recession.. History shows that we are able to run nearly permanent deficits which when we do, it’s better for the economy.. The challenge for our side from the debate would be to expose these voluntary constraints for what they re and explain why the US is not a Weimar Germany waiting to occur.. Smart Dog!.. October 13, 2013.. Post navigation.. November 2013.. M.. T.. W.. F.. S.. Oct.. 1.. 2.. 3.. 4.. 5.. 6.. 7.. 8.. 9.. 10.. 11.. 12.. 13.. 14.. 15.. 16.. 17.. 18.. 19.. 20.. 21.. 22.. 23.. 24.. 25.. 26.. 27.. 28.. 29.. 30.. Recent Posts.. Categories.. Always On.. Proudly powered by.. WordPress.. | Theme oriental by.. Ying Zhang.. 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