What can be done when conventional economic policies are ineffective? The current example of the United States

- "The problems encountered by the US economy are structural:• excess indebtedness and loss of household solvency;• required adjustment in corporate balance sheets, leading to a distortion of income sharing at the expense of employees;• resulting deteriorations in the situation of the labour market and the real estate market."
- "In view of this situation, the Obama administration and the Federal Reserve are tempted to:
• abstain from reducing fiscal deficits;• make the monetary policy even more expansionary."
- "But these economic policies can no longer be efficiently used:
• fiscal deficits will have to be reduced under the pressure from public opinion, rating agencies and perhaps financial markets later. Moreover, the United States has an overall shortfall in savings;• there is no point in increasing liquidity further, as it is already overabundant and private economic agents are deleveraging."
- "So what economic policies remain?
• the dollar's exchange rate, which is abnormally strong because of the high level of risk aversion, cannot be controlled;• we could imagine the Federal Reserve or the Treasury taking over (writing off?) part of the debt of over-indebted households (with negative equity on their mortgage loans), financed by an increase in the taxation of companies’ non-invested profits, in order to reduce household defaults and accelerate the correction in their balance sheets. The distortion of income sharing in favour of companies in fact leads to higher profits than what is needed to finance investments. This would amount to an organised partial default on the US household debt."

Natixis Flash Economics 461 20100915

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