The US seems determined to prove it can borrow, spend and print its way out of recession.
THE Western world's central bankers are in a hole. Jackson Hole. The picturesque Wyoming resort has, over the years, become home to an annual wonkfest of elite policymakers and economists.
Ordinarily, the Jackson Hole summit is a time for the central banking A-list to re-convene after the summer and engage in some light discussions. This year though, the vibe was more war zone than Woodstock.
Intergovernmental squabbles about whether more borrowed money should be spent propping up ailing Western economies have recently burst into the open, renewing jitters on global markets.
There is no consensus, either, on whether monetary policy should be eased even more, given that official interest rates are already practically at zero. The only way decisively to ease further is to print yet more money - or its modern equivalent, issue more virtual cash.
Such policy differences have escalated in the past few weeks, both within central banks and between them. Important people are starting to worry that the wildly expansionary fiscal and monetary policies that have been the Western world's response to ''subprime'' aren't working. If that's the case, we have endured the downside of such extreme measures - in terms of huge government debts, possible sovereign defaults and future inflation - for what?
Until recently, the US was fulfilling its traditional role of global economic engine-room, rescuing the rest of the Western world from the worst slump in almost 80 years. President Barack Obama and Federal Reserve chairman Ben Bernanke seemed determined to prove that the world's largest economy could borrow, spend and print its way out of recession.
While there have been signs of a US upturn during 2010, the latest news isn't good. The US grew at an annual pace of only 1.6 per cent during the second quarter, way below the government's 2.4 per cent estimate made just a month ago. On top of that, existing-home purchases were down an annualised 27 per cent in July, hitting a 15-year low. Fears are growing that a fragile housing market will sink US consumption, sending the US into the dreaded ''double dip'' and, with it, much of the rest of the Western world.
Now the stimulus is drawing to a close, US growth is faltering badly. Does that mean US policymakers will launch yet another rescue package - despite the dangers associated with yet more borrowing and money-printing? Doubts about that question have put global markets in a spin.
Across Europe, it seems the choice has been made. While additional monetary easing could still feasibly happen, further fiscal expansion looks unlikely - with governments and a high proportion of voters now saying that yet another spending boost would be not only unaffordable but also counterproductive. American officials have been more circumspect, refusing to rule out another big boost.
It was against this dramatic economic backdrop that Bernanke stood up on Friday to deliver his Jackson Hole speech. Addressing market concerns that the US policy establishment is split and a new stimulus may not happen, the Fed boss said America's central bank would do all it could to ensure economic growth, including ''providing additional monetary accommodation through unconventional measures if it proves necessary''.
On cue, the markets rallied, assuming the US would soon launch yet another funny-money missile - under the guise of ''quantitative easing''.
Bernanke's speech, though, and the spin operation that followed it, illustrated once again how little new thinking there is at the top of the Western world's policymaking establishment. The US will continue to print money and borrow like crazy - shielding its profligate moribund banks and eventually inflating away its sovereign debts.
Perhaps the US can get away with it, but Britain and Europe cannot. While the dollar retains reserve currency status, the markets are wondering if the single currency could be thrown into the dustbin of history. Further profligacy and money printing in Britain or Europe could provoke a collapse of either the euro, sterling or both - causing inflation to balloon.
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