Fool's Gold 
(or the Axis of Fools)

I'm still in the middle of Lords of Finance and have come to the part where Churchill has been brought on as Chancellor to the Exchequer by Stanley Baldwin. Churchill is genuinely undecided on whether or not to return to the Gold Standard. To help himself decide, he organizes an evening party at his house and invites the top people from both sides of the debate. All of the establishment at the Treasury and Bank of England advise him to, and so he does. BIG mistake.

Obama can't get more fiscal stimulus past the Republicans in the Senate. Bernanke needs to convince the FOMC to enact unconventional measures like inflation targeting and quantitative easing. If he doesn't we could be in for a "lost decade" like Japan's.

Nouriel Roubini and Ian Bremmer are worried about prospects for world economic growth.

Countries that save too much must also do their part for global demand. In particular, the Chinese leadership should recognise that failure to allow a more substantive revaluation of its currency will have serious consequences at home. It makes little sense to try to boost China’s local exporters while undermining the longer-term health of their best customers. Beijing must also move much more quickly to boost China’s domestic consumption.

The eurozone needs fiscal austerity, but it also needs a level of growth best provided by an easing of monetary policy from the European Central Bank. Early debt-restructuring of insolvent members should also be on the agenda. Germany should postpone its fiscal consolidation for a couple of years to boost disposable income and consumption. Outside Europe, Japan must accelerate economic reforms.

Meanwhile the IMF - who never warned about the housing bubble by the way - sees little risk of a double dip.

Peter Bienart on Why Liberals are Down on Obama. No it's Firebaggers* and Clintonoids like Eric Alterman who are down on Obama. (I bet the poor are so glad Clinton did welfare reform with unemployment at 10 percent!)

Jonathan Cohn writes about dishonesty of the Republicans.

To review the relevant history: Early in the year, leaders of the Democratic Party called for a new stimulus program--a combination of public works spending, aid to states, and other measures that, they said, would create jobs and strengthen the weak recovery. President Obama eventually came forth with a package of that would have cost the federal treasury more than than $200 billion.

The Republicans rejected this idea flatly, saying (among other things) that the country couldn't afford such to keep running such high deficits.

OK, Democrats said. How about some smaller programs? Just before the July 4th recess, Senate Democratic leaders tried to pass a $33 billion bill focusing on unemployment benefits only. The federal government has done this many times before, during downturns, in part because unemployment benefits give a real boost to the economy.** (Unemployed workers tend to spend the money right away, because they need it just to cover essentials like food and rent.) Surely that would be ok.

Nope, Republican leaders said. Even $33 billion in new deficit spending is too much. The country can't afford it.

Then, a few days ago, Judd Gregg, chairman of the Senate Budget Committee, and Eric Cantor, minority whip in the House, appeared on CNBC. When asked about the economy, the two proposed extending the Bush tax cuts that are set to expire at the end of this year. Not some of them, mind you. All of them. (A Gregg spokesperson later told me he was speaking only "generally," about the importance of the tax cuts. I'm not sure what that means, but full extension of the tax cuts has long been GOP dogma.)

What would extending all the Bush tax cuts mean, in dollar terms? According to the Center on Budget and Policy Priorities, which quickly ran some numbers at my request, extension would raise the deficit about $3.7 trillion--roughly $820 billion more than extending only the middle class tax cuts, as Democrats have proposed.

Numbers like this make people's eyes glaze over. A billion here, a trillion there. What's the difference? So maybe a more concrete comparison will help.

Rejecting a $33 billion proposal, because of its alleged impact on the deficit, and then embracing an $820 billion one is a bit like a dieter passing on a plain baked potato

...and then gorging on four pints of Ben & Jerry's Chocolate Fudge Brownie Ice Cream...

Also, if the Republicans' filibustering of further fiscal stimulus throws us into a lost decade of deflation, that will worsen the budget picture. I believe it's called slash and burn politics.

Barry Eichengreen writes:

It is almost as if governments like Britain’s are attempting to manipulate the private sector into believing that the dire conditions required for an expansionary fiscal consolidation have already been met. It as if they are trying to terrorize the private sector, so that when the fiscal ax actually falls, consumers and investors will be sufficiently relieved that disaster has been averted that they will increase spending.

If so, leaders are playing a dangerous game that depends on encouraging more future spending by exciting consumers and investors now, while depressing actual spending just when it is most urgently needed.

Or maybe politicians don’t believe any of this and are simply intent on cutting spending for ideological reasons, irrespective of the economic consequences. But who would be so cynical as to believe that?

I blame Greece! But seriously, if world growth slows to a crawl and America enters a Lost Decade, it will be thanks to Senate Republicans, the Chinese Communist Party and the European Central Bank: an Axis of Fools.***

In the meantime we can enjoy the spectacle of  Firebaggers and Clinton fanboys like Eric Alterman raging at Obama.
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* FireDogLake + Teabaggers. Their influence is too negligible for them to be included in the Axis of Fools. Clinton fanboys will switch back to Obama once - if - things turn. As if no one will remember their opportunism.
** Ronnie Raygun extended unemployment insurance for three years during the downturn in the early 1980s.
*** The Chinese dictatorship would correspond to the intransigent, self-centered Saddam-era Iraq, the ECB to the paranoid Iranian theocracy, and the Senate Republicans to the batshit crazy, epistemically closed North Korean regime.