With most of Europe in a protracted recression and struggling to regain levels of output last seen in 2008, policy from the Obama administration has stopped the world’s largest economy from suffering a similar fate, according to UBS senior advisor George Magnus.
“The idea that harsh deficit-cutting will energize private sector lending and spending, aka ‘expansionary fiscal contraction,’ has been proven to be an empty cupboard, and acknowledged as such by officials supervising the Greek debt restructuring, for example,” said Magnus in a research report released on Monday.
The only way out of the current malaise, with both the public and private sectors deleveraging, is for nations to export their way out of trouble, according to Magnus, who nonetheless added that this is incredibly difficult when every nation is attempting to do the same thing.
“It is no accident that the U.S. has bucked this trend, for now” said Magnus, noting the lack of fiscal consolidation from the Obama administration. “True, political dysfunction in Washington has been the main reason for sustained high deficits, which are pushing the general government debt to GDP ratio towards 110 percent.”
But the U.S. economy has performed relatively well regardless. U.S. dollar capital markets have not yet been punished despite the fiscal position, and unlike in Europe, where total debt ratios haven’t yet come down, the U.S. has made some progress in financial and household deleveraging, Magnus said.
That isn’t to say that America is out of trouble just yet, he said. Magnus understands why it is so difficult to convince market bears that the horizon is trouble-free.
“The level of GDP is now above its past peak, and since the employment trough, 3 million jobs have been created, replacing a third of those lost between the start of 2008 and February 2010,” he said. “Many have become more optimistic that the U.S. has ‘cracked the code’ when it comes to deleveraging and economic adjustment. Not so fast.”
Consumption growth remains weak by historic standards in the U.S., but Magnus says the improving jobs market in the U.S. will help offset higher savings by American consumers.
“With the exception of Germany, where unemployment is historically low, the U.S. has been doing pretty well in terms of job creation by comparison with other advanced economies,” said Magnus, who noted that many of those jobs are part-time. He said the number of people participating in the labor market has dropped, and the proportion of people in work has dropped to levels last seen in the 1950s.
With the Baby Boomers retiring and many people “simply unemployable for lack of education and skills,” Magnus said the U.S. is in a better place than Europe, due to higher levels of immigration.
Whether the long-term trends support growth over the coming decades remains to be seen, but for the time being, Magnus believes quantitative easing (QE) will be with advanced economies for some time to come.
“Reports of the death of QE, broadly defined to include all the major central banks’ tools and methods, are surely greatly exaggerated,” he said.
“QE has undoubtedly played a critical role here. Even though the appetite for additional asset purchase and lending programs has waned, the need for them is likely to return for as long as governments insist only on significant debt and deficit reductions in the face of structur ally weak growth, and private deleveraging,” he said. “This approach to the debt crisis flies in the face of the tyranny of economic accounting, and actually sustains the case for QE. In almost all cases, it is impossible for the private and public sectors to deleverage simultaneously without triggering or sustaining a depression.”