Tags: Roubini | Tax | Hikes | fed

Roubini: US Tax Hikes Inevitable as Fed Runs Out of Ammo

Tuesday, 14 August 2012 10:05 AM

U.S. officials will have no choice but to raise taxes to narrow fiscal deficits because Federal Reserve policy tools such as bond purchases from banks that push lending rates low won't work like in the past, said New York University economist Nouriel Roubini.

The United States is facing massive debt burdens and wide deficits, while longer-term liabilities such as Social Security and Medicare need addressing.

Streamlining U.S. finances won't take place without tax hikes, Roubini said, as austerity and cuts to public spending won't make the country healthy again without increased revenue.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

"Unfortunately, the U.S. political system is in a gridlock," Roubini told National Public Radio. "And the reality is that ... we have to reduce our budget deficit, and the way to do it is going to be a combination of reforming Social Security and Medicare on one side, but also gradually increasing the tax burden because right now it's very low, especially on those who can pay," Roubini said.

"And while we have to do fiscal austerity, if we do too much of it, next year or in the next couple of years, the risk, like in the eurozone, is that we end up into another recession because austerity, however necessary, in the short run has a negative effect on economic growth."

Since the downturn, the Fed has rolled out a series of policy tools to stave off recession, including cutting interest rates to near zero while rolling out more unorthodox policies as well, such as quantitative easing (QE).

Under QE, the Fed buys bonds like Treasury holdings or mortgage-backed securities held by banks, pumping the economy with liquidity in a manner that pushes interest rates lower to spur recovery.

The Fed has snapped up $2.3 trillion in two rounds of QE since the nation slid into recession several years ago. Talk is increasing on Wall Street that the Fed is set to intervene with a third round of easing to stave off deflationary decline and to promote job creation.

The problem, many economists say, is that Fed stimulus tools carry diminishing returns, meaning that the more they are used, the less effective they are.

"Yes, the Federal Reserve can help and so far it has helped. The fact that the Great Recession of '08-'13 did not turn into another Great Depression is due to the fact that we learned the lessons of the Great Depression," Roubini said.

Now it's time for the White House and Congress to put aside their differences to find a way to balance stimulus spending with longer-term fiscal cuts to restore more sustained recovery.

"In the short term, we need more fiscal stimulus. The reality, however, is that we're running out of policy bullets. Politically, we're not going to be able to bail out the banks and the bankers for a second time. I think there will be a political backlash against it," Roubini said.

"So if things are to turn sour compared to '08, when we had all the policy bullets, this time around would be worse."

Fed officials have suggested that Congress and the White House take the lead with fiscal reform to further spur recovery though they have repeatedly said they remain ready to intervene should the economy soften.

Eric Rosengren, president of the Federal Reserve Bank of Boston, has said the time has come for the Fed to intervene.

According to its mandate, the Fed must work to best ensure price stability and optimal unemployment rates.

The economy picked up a net 163,000 nonfarm payrolls in July, more than expected, but lost 195,000 at the same time, according to the Bureau of Labor Statistics survey of households.

“For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” Rosengren said, according to The New York Times. “I think it’s time to swim to shore.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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