Concerns over the public debt make it highly unlikely that the government will pass any sort of fiscal stimulus anytime soon. Of course, that might not make much of a difference — Congress passed stimulus bills in 2008 and 2009 and a much smaller jobs bill this year, and the economy is still sluggish and we still have lost net 2.4 million jobs since February 2009. The coming tax increase on incomes, estates, capital gains, and dividends won’t help recovery, either. And to make matters worse, fears of deflation may become self-fulfilling. Yokohama, here we come.
One way out might be for the Fed to engage in some creative monetary stimulus. In his testimony to Congress yesterday, Ben Bernanke said the Fed could act, but has decided not to. In the coming months, however, the Central Bank may no longer have that choice. An extended period of sluggish growth and joblessness, as the country crawls out from under a massive debt burden made worse by deflation, would have major — and majorly unpleasant — social and political consequences.
