In August, Federal Reserve chairman Ben Bernanke disappointed markets when he declined to launch a new round of monetary easing to support the global economy, which is showing signs of stalling.
US growth has returned to what I have called the long grind, meaning a sub-2.5% pace. There are two drivers: fiscal contraction and deleveraging in the private sector to compensate for excessive leverage in the public sector. Fiscal and monetary splurges used to offset the aftermath of the credit crisis produce unsustainable increases in public debt and central bank balance sheets. But they do not produce sustainable increases in GDP to pay them off.
The US is not alone. The eurozone has also failed to recognize the nature of its own crisis. First, liquidity is still seen as the cause of the euro debt crisis when it’s all about solvency. So the Greeks’ debt burden has not been reduced, except by a token amount. Second, there is a political denial that the geographical reach of the crisis will eventually include Italy and Spain. And this is the battlefield where the fate of the euro will be decided.
| Getting on the radar |
| Gross government debt projections |
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| Source: IMF, Independent Strategy |
Finally, it is not yet accepted by Europe’s politicians that the euro requires fiscal integration or there will no longer be a euro.