One can dream! With the Fed Chairman Ben Bernanke testifying last Friday and today on all things monetary, it appears he may be signalling an end to quantitative easing measures. With the change in control of the House we will most likely see some shift in the path of continued Fed intervention in the capital markets. David Rosenberg highlighted some of his prepared text on fiscal policy and we have narrowed the speech down to three sections. We shall see if indeed he issuing a warning that he is aware of the policy risks and will be hesitant to launch another round of bond buying. You decide. Stay tuned!
Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil.
To put the budget on a sustainable trajectory, policy actions — either reductions in spending or increases in revenues or some combination of the two — will have to be taken to eventually close these primary budget gaps.
The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.