G8 Summit Wishful Thinking

The American assessment of its financial troubles may not look like those of any other countries. The government is making an unprecedented bet that it can aid enough industries and enough state and municipalities that, together with a programs to create millions of jobs, it will be able to engineer the return of an era of 4% GDP growth. The Treasury and Fed may have to push more money into the system than they originally expected because unemployment and consumer spending are still on a trajectory pointing downward.

Essentially, the American government seems prepared to double down its bet that it can create a growing economy where there is none and that normal market forces do not have the power to craft and sustain a recovery.

The US also has an advantage the the other members of the G8 do not. They cannot continue to go to capital markets to finance their debt without facing the kind of credit rating pressure that recently hit the UK. Borrowing greater an greater sums and paying higher and higher interest rates is not an option for nations which have GDPs which are dwarfed by the US.

The American government continues to operate under the assumption that it is not anywhere close to its spending  limit. The proof of that is its ability to raise hundreds of billion of dollars in the capital markets over the last few week with only a modest tick up in rates. Russia recently reaffirmed its faith in the US dollar. The interest rates on Treasuries immediately went down. A similar affirmation from the BRIC nations, currently holding their summit, would tell the Treasury that financing a growing deficit by continuing to tap the capital markets is still a distinct possibility.

As long as Geithner believes that America can keep borrowing without substantial penalty, it will be easy to reject the notion that it is time to stop spending and let the stimulus packages as they have been set up from early last year to the present to do their work. The G8, with the exception of the US, seem to be willing to let well-enough alone.

Douglas A. McIntyre