Is prophylactic protection needed for excessive stimulus?
Last week, Willem Buiter sized up the U.S. and the U.K. and found their desire to enact deficit-financed fiscal stimulus not credible.
On a number of occasions I have cautioned against deficit-financed fiscal stimuli in countries whose governments have weak fiscal credibility, that is, countries where current tax cuts or public spending increases cannot be credibly matched by commitments to future public spending cuts and tax increases of equal present discounted value. I believe that both the US and the UK fall into this category.
Translation: Britain and the United States are banana republics and should be treated as such. I am not taking a view here yet but this is piece I recommend you read (link at the bottom). In he interest of disclosure, I should note I have been calling for stimulus recently despite having sympathy for the Buiter position on this issue.
The attached video does a better job of summing up the mood Buiter invokes and the need for prophylactic protection from so much stimulus. (Hat tip Alice Cook)
Fiscal expansions in submerging markets; the case of the USA and the UK – Willem Buiter’s Mavercon