With the U.S. economy in recession and getting weaker by the month, and with the financial system stabilized but credit conditions hardly ideal, the United States over the next few months will embark on policy initiatives that are likely to be historic.
Both fiscal and monetary policy will be used. The incoming Obama Administration is expected seek approval from the new U.S. Congress of a record $700-$850 billion fiscal stimulus package. Meanwhile, the U.S. Federal Reserve will continue with its quantitative easing plan, including $500 billion in purchases of mortgage/asset-backed securities instruments as part of its effort to improve credit market liquidity.
The need for stimulus: incontrovertible
The above initiatives will forward a pair of numbers that some Americans will undoubtedly find hard to imagine, let alone accept: a budget deficit for this year and the next of at least $1 trillion and a Fed balance sheet rising past $2.5 trillion. Most economists argue that the actions are needed to jump-start a U.S. economy that shows almost no signs of pulling out of its deepest and longest recession in decades: corporate earnings are forecast to decline, job losses continue at an alarming rate, with unemployment rising.
The economic fundamentals speak for themselves, but rhetoric and political heat that accompanies policy debate in Washington may nevertheless confuse investors -- the static and bluster can make it hard for investors to sort out what's real and what's a half-truth, or even outright propaganda.
That's why during these times it's useful to get an outsider's view of what's happening in the United States, preferably from someone from Europe, someone not close to the heat and hype that all too often accompanies U.S. policy debates. France-based media consultant Philippe Ratelle fits the bill. Ratelle was born, educated, and his lived almost exclusively in France living a middle-class life, save for a few austerity years while in graduate school.
What does fiscal stimulus support?
Ratelle says in the policy debate ahead there will be talk of "excessive government reach" and "massive government spending," but he wants American investors to concentrate on one key point.
"American investors should ask, 'What is all this fiscal stimulus protecting?'" Ratelle said. "Is it, like Sweden, protecting its large socialist state? No. Is it then protecting the life of France? Or as we say in France, le bon vie? No."
No, Ratelle says, the fiscal stimulus is designed to protect the American economic system, which is corporate capitalism and its benefits.
It's not designed to protect the national ownership of the oil sector, or free college education, or the national law guaranteeing five weeks paid vacation per citizen per year, because they don't exist in the United States.
So unless one really believes that U.S. economic conditions would improve -- and that the economic system in place would be strengthened -- if the U.S. simply cuts federal income taxes and cuts spending, or if one is a zealous libertarian, it's probably a good idea to support the fiscal stimulus, and the Fed's actions, Ratelle said.
Fiscal Policy/Economic Analysis: In the months ahead, the United States will face, arguably, its most important public policy decisions since the end of the Cold War -- and the task is huge: get this U.S. economy moving again.
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