The American Dilemma

Americans will have to decide whether they will pull their economy from the mire with more tax incentives or whether they will continue flooding the markets with dollars to facilitate business. The dilemma was clear after the pronouncement of the Chairman of the Federal Reserve (The Fed, the U.S. central bank), Ben Bernanke, in a meeting of bankers in Atlanta. The first solution is preferable for Brazil and other countries affected in the last two years by the sharp depreciation of the American currency. The excessive currency issued by the Fed spills over into international markets and affects the currency markets. The appreciation of the real, one of the consequences of this policy, makes Brazilian products more expensive in foreign currency and makes domestic industry become less competitive and less able to create jobs.

Since the deepening of crisis in 2008, American authorities have resorted to two types of policies at the same time to promote the revival of the economy. On the fiscal side, there was increased spending and tax cuts. On the monetary side, basic interest rates were kept between zero and 0.25 percent per annum; in addition, the Fed was willing to absorb an enormous volume of bonds outstanding in the market. In the current round, the second, the purchasing of U.S. securities worth $600 billion was programmed.

This second phase of monetary easing, with its termination scheduled for the end of this month, was greatly criticized by authorities in other countries for its effects on the foreign exchange market and also because the excess of money, according to various analysts, facilitated speculation in commodities.

Fed officials have already indicated a willingness to keep interest rates low for a long time, but a third round of securities purchases seems outside of consideration. The purpose of this policy would be the first step toward a less expansionary monetary strategy.

But the end of this round coincides with a new, worsened American economic condition. The latest data on the growth of activity and employment generation were considered disappointing. In the first quarter the GDP grew at a rate equivalent to only 1.8 percent per year. Supply chains were affected by the earthquake followed by the tsunami in Japan. Last month 54,000 jobs were created. The financial market forecasts had indicated something closer to 160,000.

On Wednesday, a day after the Bernanke conference, the new edition of the Beige Book, an economic overview assembled with information from 12 districts of the Fed, was published. The tone was somewhat less gloomy than the lecture, but the Fed’s chairman certainly knew all the data when he prepared his speech.

It is not clear if the weakening U.S. economy is temporary, or if the negative data indicate a new trend of stagnation. But, Bernanke argued, we must act. The best way out, he said, is to extend the tax incentives and to plan a long-term effort for the fixing of public accounts. President Barack Obama already has declared himself willing to consider an extension of incentives for companies and workers.

The big problem is in Congress. Republicans promise to promote a large cut in federal spending, accelerating the adjustment of accounts. Moreover, the government faces difficulties in obtaining an increase in the debt ceiling, which today is set at $14.3 trillion. The executive branch must obtain approval of this change before the end of June. Though approval is likely to be gained, the prolongation of stimulus measures involves very difficult negotiations.

Without fiscal impetus and without monetary expansion, the recovery of the U.S. economy will be very difficult. No contribution to growth will come from Europe, which is mired in the problems of heavily indebted countries.

If the Americans opt for the prolongation of budgetary incentives, they will be putting off, for the long-term, serious fiscal problems. But they can resolve them more easily within a framework of greater prosperity. The short-term gains could be considerable for the whole world.