Yes, But He Has Good Intentions

Czech Premier Mirek Topolanek does not like the $2tn effort by the Obama administration to stimulate the U.S. economy. He does not like it one bit:

BRUSSELS -- The prime minister of the Czech Republic slammed President Barack Obama's plan to spend nearly $2 trillion to push the U.S. economy out of recession as "the road to hell" that European Union governments must avoid.

The blunt comments by Mirek Topolanek to the European Parliament on Wednesday highlighted simmering European differences with Washington over spending plans, ahead of a key summit next week on fixing the world economy. ...

"All of these steps, these combinations and permanency is the road to hell," Mr. Topolanek said. "We need to read the history books and the lessons of history and the biggest success of the [EU] is the refusal to go this way."

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market," Mr. Topolanek said.

The last part is key: since all of the U.S. demand-side spending is funded by deficits, the result is reduced liquidity of dollars for the managing of international accounts. Since the dollar is still (for now) the world's reserve currency, this puts pressure on other central banks to manage their balance of payments accounts more carefully, at a time when many of them would prefer more flexibility to pursue counter-cyclical policies.

I hope to have more to say about this, and how it relates to America's de facto as role as organizer/stabilizer of the international macroeconomy, in the near future.

More Overnight/Early Morning Developments

The Federal Reserve, along with the European Central Bank, the Bank of England and the Swiss, Canadian and Swedish central banks enacted, a coordinated, emergency cut in their benchmark interest rates early this morning. This comes in response to massive stock market declines in Japan, Russia, Indonesia and many other global indexes overnight along with further market interventions by European governments and central banks to prop up failing institutions, as Tom observed. The cut's timing also shows the urgency of central bank officials attempting to stem the fear of the aforementioned developments from further battering European and American markets during today's trading.

This is purely and clearly a psychological move by the world's central banks. Something needed to be done, in a coordinated way, to show the markets that the central banks were ready and able to intervene to stem any remote possibility of global financial collapse and the central banks believed further liquidity was the answer. But the problem is not liquidity, its confidence. How lowering a target rate that does not actually really matter (check out the data on the effective FFR over the past 3 weeks), will fix the problem, I can not see. Lowering the target as a purely psychological tool to attempt to impact investor confidence, may have an impact. How much of an impact and will the impact be enough? I have no idea but, I guess we'll see.