Several accounts off the Great Recession talk about higher demand for money being a driving force, I don't see it. I see it as reactionary to another force.
Sure you can make a case that the recession drove up the demand for more savings, but coincidence doesn't work so well when there are potential causal factors shifting a quarter or two prior.
In my previous post I noted that sales declined first, with layoffs not starting at unusual rates until late 2008, with the implication being that the rise in UE rate in late 2007 through mid 2008 was primarily caused by a lack of new job creation, not layoffs.
The Federal debt ramp up has been stunning and barely commented on for its magnitude, it has risen by a larger share of GDP in the years after the end of the recession that it did during the recession. We have not seen a sustained decline since the end of the 1990s, and there is only one sustained decline in Federal debt as a share of gdp sine 1980, making 33 of the past 38 years either flat or increasing debt to GDP. The most worrying is the past decade plus now where the deficit has exceeded GDP growth every single year. This is a large phase shift from the post WW2 economy where such years were rare, occurring only 3 times from 1948 through 1970, with each one being only a small net deficit.
This is obviously something that cannot continue indefinitely (although Japan shows that it can continue for long stretches), but more worrying is that the typical path out of high debt levels has been robust growth and that is less and less possible. I don't just mean because we appear to be in a low growth era, but that with debt levels this high more growth, which ought to lead to higher interest rates, will mean more debt payments. Debt levels of over 100% of GDP make it very difficult to grow out of debt when starting with an annual deficit, and when you are starting with a budget deficit during growth years? Yikes.
One might argue that a government can borrow long, locking in interest rates, and then absorb growth because it wouldn't increase its deficit. This is true on one side of the ledger only, as it would only be transferring losses to the holders of that debt. To make it work you need to have those losses not end up as a drag, preventing the very growth that you need to get the debt/GDP ratio back under control.
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I don't have a good segue here, so I will just plow on ahead. There is an idea in economics called monetary offset, basically it is that the impact of fiscal decisions (ie spending decisions made in Washington DC) can't be determined without looking at what the Federal Reserve does in response. A fiscal 'stimulus' program that expands the deficit would only be expansionary if the Fed doesn't tighten in response. The failure of this mode of thinking is the assumption that there is a bright line between Federal spending actions and Federal Reserve actions, there doesn't truly appear to be. One example: If the composition of Federal spending has an impact on the economy, that spending $100 billion on defense is different from $100 billion in tax cuts which is different from $100 billion in Medicare expansion which is different from $100 billion in interest payments, then Federal Reserve policy that effects the interest payments of a government is functionally fiscal policy. A shift in interest costs would shift money either away from or toward other programs which would have a different 'multiplier'. Most Keynesian models assume that there are at least some differences, with different multipliers for tax cuts vs spending increases during a recession, and most argue that 'productive' uses of money will have higher multipliers than non productive ones (Keynes himself made that argument as well). On the flip side of this the Federal Reserve has a dual mandate to manage inflation and unemployment, and therefore any Federal spending that impacts either of these two will in fact be influencing monetary policy.
Monetary offset relies on the idea that the Fed moves last, and that after noticing the fiscal actions they will 'correct' the economic course. It also implicitly relies on the Phillips Curve being real, or that 'stimulus' attempts can't cause UE (which are similar ideas). If those don't hold then the Fed doesn't have the power to offset in all situations, it only has the power to choose a path and take a bad outcome either way.
I can't help but noting here that the largest recession in my lifetime came in concordance with the Federal Government and the Federal Reserve acting in combination early on (and even prior to) what was at the time a relatively mild recession. Lost to the collective memory hole is the fact that the Federal Government passed a 100 billion dollar+ stimulus package in early 2008, before the recession was even officially a recession. The Federal Reserve was even faster on the stimulus train having started interest rate cuts in July of 2007, going from a FFR of 5.25% then to 2% in August 2008.
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I don't have a good segue here, so I will just plow on ahead. There is an idea in economics called monetary offset, basically it is that the impact of fiscal decisions (ie spending decisions made in Washington DC) can't be determined without looking at what the Federal Reserve does in response. A fiscal 'stimulus' program that expands the deficit would only be expansionary if the Fed doesn't tighten in response. The failure of this mode of thinking is the assumption that there is a bright line between Federal spending actions and Federal Reserve actions, there doesn't truly appear to be. One example: If the composition of Federal spending has an impact on the economy, that spending $100 billion on defense is different from $100 billion in tax cuts which is different from $100 billion in Medicare expansion which is different from $100 billion in interest payments, then Federal Reserve policy that effects the interest payments of a government is functionally fiscal policy. A shift in interest costs would shift money either away from or toward other programs which would have a different 'multiplier'. Most Keynesian models assume that there are at least some differences, with different multipliers for tax cuts vs spending increases during a recession, and most argue that 'productive' uses of money will have higher multipliers than non productive ones (Keynes himself made that argument as well). On the flip side of this the Federal Reserve has a dual mandate to manage inflation and unemployment, and therefore any Federal spending that impacts either of these two will in fact be influencing monetary policy.
Monetary offset relies on the idea that the Fed moves last, and that after noticing the fiscal actions they will 'correct' the economic course. It also implicitly relies on the Phillips Curve being real, or that 'stimulus' attempts can't cause UE (which are similar ideas). If those don't hold then the Fed doesn't have the power to offset in all situations, it only has the power to choose a path and take a bad outcome either way.
I can't help but noting here that the largest recession in my lifetime came in concordance with the Federal Government and the Federal Reserve acting in combination early on (and even prior to) what was at the time a relatively mild recession. Lost to the collective memory hole is the fact that the Federal Government passed a 100 billion dollar+ stimulus package in early 2008, before the recession was even officially a recession. The Federal Reserve was even faster on the stimulus train having started interest rate cuts in July of 2007, going from a FFR of 5.25% then to 2% in August 2008.
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