Governments could do more

The world economy is slowing and a return to negative growth in Europe and America is a real possibility. There is a lot governments could do to prevent this.

Governments everywhere are cutting spending and raising taxes with the aim of cutting their budget deficits leading to a fall in demand. This is not what the world economy needs right now. Some states understandably needs to get their house in order, Greece, Portugal, Italy and Spain are in this category. But many of the nations who are not plagued by high interest rates on their debt are also tightening the belt. If another recession is to be prevented it would be a good idea for those economies who can afford to do so to stimulate demand by increased spending or cutting taxes. This would have to be financed by additional borrowing but it is hard to imagine a more advantageous time to borrow then now when investors are thirsting for the safety of government bonds. The United States, Germany and Japan can all borrow at almost no cost when taking inflation in to accountant. signaling that their debt burden is not a problem and there is room for much more borrowing. Increased spending by these nations together with those smaller states with sound finances could help compensate for the necessary austerity measures in the troubled European countries.

Then there is the ECB which has lots of room to act with its key interest still relatively high. A lowering of which should greatly help the economy. Over in America the prime interest rate is still near zero, making it harder for the Fed to boost the economy by conventional means. But since they control the money supply there is no limitations on their ability to support the economy, even if this will have to be done by less tested and therefore more uncertain measures such as quantitative easing. The risk of an expansionary monitory policy is always high inflation, but with such a weak economy this should be less of a risk. If the inflation figures ends up a bit over the central bank targets this would of course not be a good thing, but preferable over a return to recession.