Is Buying Time the New Steady State?

Could the concept of “buying time until a solution is generated” have come to be regarded as the “solution” itself, given the nature of the political backdrop in Europe, as well as in the US?

The approach of “buying of time” implicit in recent ECB and Fed action/rhetoric exemplifies the constraints imposed by political inertia in the design of economic policy.

Political leaders have largely been reactive/behind the curve, adopting a largely short-termist perspective.

The procrastination of Eurozone leaders has cost a lot of pain and time in attempting to contain the crisis.

Likewise, failure to effectively address the ‘fiscal cliff’ has led to a protracted period of weak business sentiment in the US, weighing substantially on the prospects of economic growth. 

The so-called ‘political cost’ is simply too large to ignore.

In a sense, the contribution of central banks has become the ‘only game in town’, in stark opposition to slow, often deficient decision-making processes and lack of wholehearted initiative on the part of governments; esp. in the Eurozone.

To put it differently, necessity (central bank contribution via monetary policy measures) has come to be seen as ‘quasi-sufficiency’ in a world of subpar political leadership.

This is potentially very dangerous, both from the monetary and fiscal policy angles.

The farther into uncharted territory central banks go, the greater the risk; markets become ‘addicted’ to central bank action, the associated measures’ effectiveness is arguably diminishing in strength with time and the eventually inevitable ‘exit strategy’ situation becomes more unpredictable.

Likewise, the longer governments keep choosing to avoid confronting reality head on, the harsher the consequences down the line are likely to be.

It is interesting that expiry of the fiscal cliff-related measures is automatic; politicians had simply agreed to postpone having to think about key issues until a later date..

The ‘reality’ is two-fold: fiscal policy should work with, and not rely on, central bank initiatives; AND

the appropriate planning-horizon now, more than ever, has to transcend political ‘cycles’ such as a presidential term.

Yes, both Europe and the US need to reduce their debt levels (and debt/gdp ratios), but a gradual phasing-in of the necessary debt-curbing measures is of utmost importance.

It is in the nature of ‘balance sheet’ recessions to require a longer timeframe when it comes to economic policy design.

Policy uncertainty can never be conducive to boosting ‘animal spirits’, an essential element for any recovery.

Coming to accept that high doses of policy uncertainty have become a part of the ‘steady state’ would be detrimental to the global economy.

‘Economic’ is meant to encompass ‘monetary’ and ‘fiscal'. 
It is in this combination where any type of 'solution' has to be founded. And a pragmatist would certainly argue that this solution will not come in the form of a one-off, 'bazooka' kind of response, but a long-term framework plan that goes beyond political self-interest (hence can be gradually and credibly enforced).

This is no time for complacency. Let’s hope that “buying time” as the bridge to a “solution” does not come to be perceived as the solution itself.  Because it cannot be.


Below, an interesting interview of Marc Faber on Bloomberg earlier this week.