Barack Obama was in effect stretchered off the field at the G20, having failed to persuade fellow world leaders to sign up to a further round of economic stimulus. Instead, the final communiqué was an austere affair, promising efforts to curb government spending, reduce deficits and start reducing the mountains of debt. In the World Cup of Economics, it was Austerity 4, Stimulus 1.
And in the US? While the President has been admonishing others on the international stage, he appears also in danger of losing the same arguments at home. Congress has three times failed to pass a new mini-stimulus aimed at extending benefits for the long-term unemployed and, across the country, states are slashing spending in the teeth of a vicious budgetary crisis. The fear of sky-high deficits and the costs of servicing huge national debts have breathed life into an austerity movement in a country that is already instinctively sceptical of government spending.
For the gloomiest investors it is a worrying time: government cannot afford to stimulate their economies, and they cannot afford not to.
A new bout of nerves over the trajectory of the global economy sent shares plunging across the world yesterday. In Europe, the European Central Bank is about to end a year-long €442bn (£357bn) programme of lending to the financial markets, which has provided an important prop to the continent's banking system. In China, disappointing economic data suggested that its rate of GDP growth may be on the verge of slowing. And in the US, consumer confidence tumbled sharply in June, according to a survey by the Conference Board. The reading of 52.9 compared to 62.5 in May and was about 10 points below Wall Street forecasts, raising fears that the US consumer might pull back their spending and hamper the nascent recovery.
There was also a report on house prices which reminded economists once again that the US housing market, locus of the 2007-09 credit crisis, has been propped up by a government tax credit for homebuyers that has now expired and not been extended by Congress. By lunchtime in New York, the Dow Jones Industrial Average had fallen 2.3 per cent. Earlier, the London FTSE 100 closed 3.1 per cent lower.
Ben Bernanke, chairman of the Federal Reserve, was at the White House yesterday talking economic policy with the President, and both he and Mr Obama rehearsed an expansionary script in their post-game press conference. The recovery is progressing, the President said, and there must be further efforts to stimulate the job market and reduce stubbornly high unemployment. The official employment statistics for June are out on Friday morning, and are expected to show the unemployment rate back on an upward trajectory at 9.8 per cent.
Neither Mr Bernanke nor the President yesterday mentioned the elephant clomping around the room, namely the giant national debt. The current budget deficit, at 11 per cent of GDP, eclipses that of the UK and the eurozone as a whole, although at 66 per cent of GDP, the total debt is not at the levels of the so-called PIIGS of Europe (highly indebted Portugal, Italy, Ireland, Greece and Spain). These are historically high levels, nonetheless, and breach several economic rules of thumb. A deficit of 3 per cent of GDP is typically seen as the maximum sustainable rate, and the US does not manage to fall below that even in the best years of the projected economic rebound; Harvard professor Ken Rogoff has suggested that 80 per cent net debt to GDP rates are the maximum possible before sovereign debt crisis become likely, and the US comes close to reaching that later this decade as the rising healthcare and social security costs of the ageing population kick in.
Larry Kantor, head of research at Barclays Capital in New York, surveyed the scene in an investment note to clients. "The combination of a lack of fiscal discipline and the resulting build-up of debt levels over past decades, the sheer size of government spending relative to GDP, the impact on finances of the severe recession and policy response to it, and unfavourable demographic trends are challenging the fiscal capabilities of most developed countries," he said. "While the focus has been on Europe because of Greece, the severity of the problem and the extent of needed tightening are greater elsewhere, including the US, which has seen one of the sharpest deteriorations in fiscal position as it boosted its deficit aggressively to counter the recession."
These worrying forecasts for the US have emboldened critics not just of long-term government spending programmes – the "entitlements" to pensions and government health insurance for the elderly – but also of short-term stimulus measures.
Last week, a handful of moderate Democrats joined Republicans to defeat legislation that would have extended unemployment benefit for the long-term unemployed, for whom payments are coming to an end. The Bill had twice been watered down to try to ensure passage, but still proved unpalatable. The $85.5bn Bill was also going to send money to cash-strapped states to help pay for health benefits, and as many as 30 of the 50 states had already factored the money into their budgets. The loss of the cash will be another wrench as state governors fight to impose swingeing cuts in order to get budgets back into balance.
This is the unspoken austerity sweeping the US. Governor Edward Rendell of Pennsylvania called it "bloodletting". New Jersey, for example, yesterday passed a budget that cut hundreds of millions of dollars from education and added levies on businesses, students, the elderly and the disabled. Assembly budget officer Joe Malone said the decisions were "beyond difficult" but "New Jersey has experienced the greatest loss in revenue in state history. The end product is austere, honest and responsible for everyone in our state." Neighbouring New York, meanwhile, has failed to pass a new budget, three months after the end of the financial year, amid haggling over cuts and new taxes such as ones on soft drinks.
The local battles foreshadow a larger one looming on the national stage when Congress must decide whether to let the Bush-era tax cuts expire in part or in full. Barclays calculates that letting them expire in their entirety would amount to a 2 per cent fiscal tightening. The Obama administration is committed to keeping the cuts in place for all but the rich, but the debate will be a key test of how far Mr Obama has lost possession to Team Austerity.