"The current fiscal path of the federal government is unsustainable." This sentence begins any discussion about the future of US fiscal policy and CBO uses it a lot. But when they go into detail about the increased possibility of a fiscal crisis related to our rising fiscal debt picture, it's bound to raise some eyebrows on Capitol Hill - not to mention sending shivers down some spines on both sides of the aisle.
As of mid-morning Friday, U.S. and overseas markets await the results of the stress tests conducted on European banks, to be released at noon. Based on the Fed’s stress tests of U.S. banks, the idea is to give markets credible information (and presumably assurances) about the financial condition of individual European banks, which have been under great pressure from the fiscal crisis in the eurozone.
Larry Summers, the Administration's top economist (and former CRFB board member), has an op-ed in the Financial Times today, looking at why the current debate in Congress muddies the fiscal waters.
The (brief) stock market rally had dominated trading in the earlier part of the week. However, investor interest in U.S. government bonds picked up again toward the end of the trading week with a refocus on safe haven effects and increased signs of U.S. economic weakness. As a result, yields on the benchmark 10-year Treasury bond dipped below 3 percent again and came close to lows for the past year. (Yield haves been below 3 percent a lot of the time since late June and now.) The 30-year government bond has performed similarly.
According to the Council of Economic Advisors’ (CEA) quarterly report on the continuing effects of the American Recovery and Reinvestment Act (ARRA) (see our analysis of ARRA here), the magnitude of the fiscal stimulus and its positive effect on the U.S. economy have been increasing substantially in the first half of 2010 (from $108 billion in Q1 of 2010 to $116 billion in Q2).
Markets are justifiably confused about the strength of the economy: is growth slowing? Is it slowing a lot or just a little? Will it keep chugging along and sustain forward momentum as fiscal stimulus lessens? A reasonable case can be made for any of these views based on a reading of key indicators in the U.S., Europe and China.
Here are the highlights from this weekend’s editorials on fiscal and budget policy:
The Denver Post said that although they opposed a large stimulus package, they did not believe that Congress should penny pinch on the unemployed in the current economic situation. Noting the recent upward trends in unemployment claims, they believed that it was important to extend benefits in an economic climate where "even the most talented and ambitious job-seekers" cannot find a job. The Post believed that the benefits of extending unemployment benefits outweighed the costs of not paying for them.
Alberto Alesina of Harvard University has a new paper out that talks about how differences in the composition of debt reduction packages make a difference in terms of success. He looks at which contractions have been fiscally successful, less harmful to growth, fiscally unsuccessful, or more harmful to growth. In addition, he examines the political ramifications of tightening fiscal policy and whether they necessarily lead to the incumbent being voted out of office.
Yes, financial markets too are being affected by the World Cup. So far today, trading is quiet – even though today is one of the famous Triple Witching Days (which is not about Harry Potter but the day each quarter when contracts in three main markets must be settled and which are famous for being unpredictable). Sometimes however thin markets can be volatile.