The amount of state debt does not matter? The analyst indicated what is bothering the world economy

Tempting cocktail

According to the author of the commentary, former US Treasury Secretary Lawrence Summers deserves admiration for his willingness to stand up to the economic stimulus package proposed by the new President of the United States Joe Biden. Summers will probably pay a high price for it in the Democratic Party, but at a politically sensitive time he has preferred the country’s interests to party interests, Lachman acknowledges.

At a time when most academic economists are devouring an imaginary cocktail “on a budget deficit,” Professor Summer – much to the disappointment of the Democratic leadership – argues that Biden’s extraordinarily large stimulus budget poses a significant risk to the US economy, a former IMF official points out. He believes that Summers would be even more apt if he emphasized not only the risk of inflation, but also the threat to financial stability that Biden’s carefree stimulus brings.

There can be no doubt that Summers is convincingly showing that Biden’s package risks overheating the US economy“Lachman continues.” He agrees with the former US Treasury Secretary that the proposed $ 1.9 trillion stimulus package follows on from the $ 900 billion package approved in December 2020, bringing the combined package to 14% of the annual performance of the US economy. which is three times the budget stimulus approved by then-President Barack Obama in 2009.

The US economy, on the other hand, is in much better shape today than it was in 2009, the analyst admits. He explains that the cause for concern about inflation stems from the fact that the stimulus package is to come at the same time as the US Federal Reserve “goes full throttle” and increased its balance sheet by $ 4 trillion in less than six months, which in the Obama package lasted practically 6 years.

According to the author of the commentary, the key point that Summers overlooks is that Biden’s budget experiment comes at a time when we are in the middle of a general stock and credit bubble caused by the Fed’s enormously loose monetary policy for many years. As a result, Summers ignores the real risk that a carefree US fiscal policy could become a trigger that will cause the current bubble in global financial markets to burst.

When the bubble bursts

It’s not just that today’s US stock value is at the extraterrestrial levels we last saw before the (New York) stock market crash of 1929. It’s not just that high-risk domestic and foreign borrowers can borrow at interest that they are not much higher than those borrowed by the US government“He considers it important that the Fed ‘s enormously loose monetary policy keeps large amounts of money flowing to emerging economies at a time when the economic outlook for these countries is more threatened than ever before.

Thus, the bubble in the global stock and financial markets is mainly the idea that the current low interest rates will last forever, warns the economist. He adds that if the Summers are not wrong and Biden’s package will overheat the US economy, the Fed will have to start raising interest rates to prevent inflation from rising.

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When that happens, it is very likely that existing stock and credit bubbles will burst as markets realize that their investment decisions were based on a poor assumption of low interest rates indefinitely, Lachman said. He believes that Biden’s stimulus package thus poses a risk not because of the stimulation of higher inflation, but because of the bursting of bubbles in the stock and financial markets.

It would be a fatal mistake to underestimate the negative impact of such a burst on the United States and the global economy, given how much larger and more pervasive these bubbles are today than they were in 2008.“The author considers it justified that Summers is sounding the alarm about the carelessness of Biden ‘s stimulus budget proposal. However, he himself sees as a greater risk a similar collapse of global financial markets as in 2008 than an unpleasant rise in inflation.

Source: EuroZprá by

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