The Republican Party in the United States has successfully turned “stimulus” and “bailout” into dirty words, and has put President Obama’s Democrats in the defensive ahead of the November 2nd mid-term elections. In an essay published two weeks ago, George Soros argues that this is a misconception, that markets do need to be “rescued” if or when they get bogged down in self-destructive feedback loops. Soros calls for a focus on the mirror-image imbalances afflicting the US and Chinese economies. By way of solutions, he opposes both QE and the “fear of deficits” and prescribes instead a government-led “investment New Deal” in the United States, coupled with a gradual appreciation of the Chinese currency.

The rest of this post is an extract of George Soros’ essay in his own words, covering all the main points:

THE imbalances that were at the root of the crash of 2008 remain to be corrected and the private sector is unable to do it on its own. The US still consumes more than it produces, running a chronic trade deficit. Consumption is too high at nearly 70 percent of GDP, compared to an unsustainably low 35.6 percent for China. Households are overindebted and need to increase their savings rates. The US economy badly needs investments that enhance productivity but the private sector is unwilling or unable to provide them. US corporations operate very profitably but instead of investing their profits they are building up their liquidity—accumulating money, not investing it. In these circumstances there is a strong case for government intervention. Admittedly, consumption cannot be sustained indefinitely by running up the national debt. But to cut back on government spending at a time of large-scale unemployment would ignore all the lessons learned from the Great Depression.

The obvious solution is to draw a distinction in the budget between investments and current consumption and to provide additional stimulus for investments but not for consumption. Such a stimulus program coupled with a gradual appreciation of the renminbi would go a long way toward correcting the prevailing imbalances. Consumers would spend less on imported goods because they would cost more and corporations would find it more profitable to invest at home, creating more jobs. The trade deficit would shrink. Prices would move toward the inflation target of 2 percent, removing the threat of a deflationary spiral. The economy could start growing its way out of the prevailing imbalances.

China should find it in its own interest to contribute to this outcome by allowing the renminbi to appreciate, especially since that would also contribute to correcting its own internal imbalances which are the mirror image of the American ones. The US is threatened by deflation; China suffers from inflationary pressures. The US consumes too much, China too little. The US needs to cut its trade deficit, China its surplus.

These policies are more desirable than quantitative easing, which has negative side effects both at home and abroad. As Keynes famously observed, “you can’t push on a string”—quantitative easing is more likely to generate asset bubbles and currency turmoil than employment.

Unfortunately the Obama administration is pushed into the wrong policies by political pressures. A large majority of the population is convinced that the government is incapable of efficiently managing investments. Again, this belief is not without justification: a quarter of a century of calling the government bad has resulted in bad government. But the claim that government spending is inevitably wasted is patently false: the New Deal produced the Tennessee Valley Authority and the Triborough Bridge and other utilities that are still in use.