Obama’s press conference wasn’t as bad as it could have been; he actually more or less said that stimulus should be sustained, except it isn’t politically possible. But he also invoked the confidence fairy – and introduced another fallacy, showing that he and his advisers still don’t get the essence of macroeconomics in a liquidity trap:
I do think that if the country as a whole sees Washington act responsibly, compromises being made, the deficit and debt being dealt with for 10, 15, 20 years, that that will help with businesses feeling more confident about aggressively investing in this country, foreign investors saying America has got its act together and are willing to invest. And so it can have a positive impact in overall growth and employment.
OK, so that’s the confidence fairy at the beginning. But the “foreign investors” thing is actually worse.
Think about it: U.S. interest rates are low; there’s no crowding out going on; we are NOT suffering from a shortage of saving.
So if foreign investors decide they love us, what does it do? It drives up the value of the dollar, which reduces exports, which leads to fewer jobs.
Does this sound familiar? It’s closely related to the reasons Chinese accumulation of dollar reserves unambiguously hurts the US economy when we’re in a liquidity trap. And what we just learned is that the White House still doesn’t get it.
Mind you, this failure to comprehend is minor compared with what’s going on across the aisle. But it’s still disappointing and depressing.
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