Why the benefits of austerity are not as straightforward as you might think

August 2011 has come to an end and the final week was a bit calmer than the preceding three. The Bernanke speech was the highlight and, in many ways, the Fed Chairman had no major surprises for us.

He made it clear the Fed stood ready to do more in the event that the economy disappoints. While further easing of financial conditions would not be harmful, it is not clear these steps will have lasting effects unless additional jobs are created, companies are willing to invest more, or consumers feel less pinched by weak house prices. Many believe the US and global equity market recoveries since the dark days of 2008 are all due to the Fed’s aggressiveness. They argue the violent swings interrupting the moves upwards occurred when the Fed has started to curtail its largesse, or has thr...