Leading Economists Favor more Fiscal Stimulus

I have already written that leading economists like Joseph Stiglitz, BCA Research or Paul Krugman are in favor of more fiscal stimulus to tackle the current economic crisis. Now you can add Nouriel Roubini who gave a remarkable interview on wsj.com:

BCA on US and Emerging Economy

On August 11 BCA Research analyzed the US economy in a special repot in light of the markets recent panic attack. The market is concerned about the state of trends in public sector debt and the outlook of sluggish growth:

1. The developed economies  are on a path called "New Normal": generally higher unemployment, higher savings and lower consumption, and hence lower overall growth.
2. Moreover, we are currently in a classical liquidity trap where at low of a business cycle monetary policy is useless.
3. Therefore the US needs some short term fiscal stimulus to exit the vicious cycle where weak hiring depresses consumer spending and validates their continued business caution.

BCA mirrors Joseph Stiglitz view: We need a Keynesian approach to fix the US economy. The only problem with this approach is that George W. Bush amassed public debts in a booming economy after Bill Clintons prudent fiscal policy (i.e. houshold surplus). Today, with sky high debts it is difficult to increase.

Emerging markets are in a much better position. Although their current problem with inflation is the classic cyclical overheating. With solid growth they are in a position to withstand the classical response of  tight monetary policy. Also cooling food and energy prices should lower inflation rates. Emerging economies become more reliant on domestically driven growth, although exports to developed countries remain important.

To sum up, global growth is heading for a cooler period and serious downward risk to growth remain:

"If unemployment rises, then it exacerbates financial and economic imbalances, thereby creating negative feedback loops."...  "it will require an aggressive policy response to stabilize financial markets and boost business and consumer confidence."

Big Mac

The beefed up Big Mac index of the Economist illustrates the under and over valuation of currencies in terms of purchasing power. The new recipe which adjusts the original index by taking into account GDP differences per person culminates in following table:

Bottom line: Brazilian Real and Swiss Franc are heavily over valued against the US Dollar. Brazil and Switzerland are victims of the expansive US monetary policy and the raging debt crisis. The Chinese Remninbi is not over valued after controlling for the GDP difference because it is pegged to the Dollar.