Read what you choose into the gyrating US stock market. Blame, if you like, the dysfunction in Washington and the unsatisfying deal that led Standard & Poor’s to remove America’s triple A rating. Or worry about Europe, lurching from one phase of its sovereign debt crisis to another. And of course, many investors fear that torrid growth in emerging market countries is slowing quickly.
While these cross-currents weigh on stocks, the principal factor behind the swoon in equities is an American economy that is decelerating without a persuasive plan from either political party for addressing it. The economy is enmeshed not in a virtuous circle but in a vicious one, in which weak consumer spending helps restrain American companies from hiring, which in turn means fewer Americans at work generating spendable income, and so on. That’s the crux of the problem, to which the US correctly applied the classic macroeconomic response: an expansionary fiscal policy and an equally loose monetary policy – short-term interest rates at zero and two rounds of quantitative easing.
To a degree, the medicine has worked. However troubled the US economy, it would be in far worse shape without those policies. Instead of modest growth, the country would remain in recession. Instead of nearly 2.5m private sector jobs created in the past 17 months, the bleeding of employment would have continued unstaunched.