Wednesday, March 25, 2009

American Economic Exceptionalism

So, I'm watching this video that Robert Stacy McCain posted in which Peter Schiff is calling for austerity, increasing savings, etc:

It's extremely appealing argument to FLG. We got into this mess, at least in part, through loose monetary policy. Logic dictates that more government spending and quantitative easing aren't the ways to get us out. Furthermore, if a similar situation happened in a Latin American country the IMF would only provide a bailout if the government got its fiscal house in order, but the US Government is going in precisely the opposite direction at full clip. Nevertheless, I fear this analysis is oversimplified and ultimately wrong.

First, I agree loose money dating back to the 1990s got us into this, but this doesn't mean that loose money can't get us out. To steal an analogy from Paul Krugman: If I run somebody over in my car the answer isn't to slam on the brakes, throw it in reverse, and gun it backwards. Perhaps we are in a similar situation economically. Second, the IMF isn't going to bail us out. It can't. The American economy is too damn big. More importantly, the American economy is the central hub of the global economy. If Argentina's economy goes belly up, it's tough for Argentines, her neighbors, and some investors, but the global economy keeps moving. If the US freezes the whole thing drops dead. To put it simply -- the US is too big to fail. Likewise, there are only three possible explanations for people saying to let these huge financial firms fail -- 1) They're insane. 2) They have no idea what the fuck they are talking about. 3) They got the world's largest set of cajones and are willing to risk a financial Armageddon in support of free-market principles.

Just as the constitution is not a suicide pact, neither are free-market principles. All that said, I'm really fucking uncomfortable with all this.

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