Dr. Bernanke's Dilemma; starve or stimulate the economic patient
With hyperbolic hyperbole filling the space that should be occupied with solutions during America's 2012 elections, all eyes will be on Fed Chairmen Ben Bernake looking for anything remotely signaling a shift towards a new round of quantitative easing.
Watching Europe continue to struggle in spite of aggressive cuts in spending may give the Fed Chairmen a fresh perspective. A willingness to mildly suggest a stimulus package with enough juice to resuscitate the US' flirtations with flatlining growth, might just invigorate the global market's imagination.
At the very least, it would indicate the Americans are ready to demonstrate leadership again. To parallel recessionary inducing austerity policies being rejected by Europeans may seem idiotic, but to do otherwise during this election cycle will only resuscitate the Ron Paul campaign.
Since the UK reported today they've officially slipped into another recession, it begs one to wonder if "austerity for the masses" is not the actual root cause of stagnant growth. Surprising most economists who'd expected Britain's economy to eke out modest growth in early 2012, the end result appears to be consistent with other EU members strangling themselves with said measures.
Unfortunately, those early forecasts were upset by the biggest fall in construction output in three years, along with anaemic service sector growth and a fall in industrial output. The UK government desperately needed respectable growth to eliminate Britain's huge budget deficit over the next five years.
However, with many of Britain's euro zone trading partners themselves in recession, its gonna be a hell of a task climbing out of their economic hole with austerity as the only tool they're willing to use. These bad figures also constitute a real problem for the Bank of England. Contemplating ending its second round of quantitative easing gilt purchases on the assumption the underlying economy was strengthening, now the BoE has to completely rethink its strategy. And quickly. "Today's figures confirm that there is a genuine debate to be had on whether the committee needs to sanction more QE," said Investec economist Philip Shaw.
That being the case, we're interested to know how the Obama administration and its GOP rivals will respond to the negative domino effect of Europe's policies. Can we expect action? Hardly, but the markets would be appreciative if one could discern if Ben Bernanke is strong enough to propose a round of stimulus after watching Europe sink into a financial coma.
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