We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not the prospect. No reputable forecaster is producing anything like a Great Depression. So it's still OK if you spend a little bit. You do not have to put all your money into a mattress.
Dr. Leamer also sees the economy in a "healing cycle" by the second half of 2009, without "significant growth", but with fewer of the "large negatives" we've seen so far.
We shall see. I do not think that the errors and excesses of the boom years will be corrected by then. My guess is that the inflationary recession will continue for a period of years rather than quarters, particularly since government policy seems driven to prevent markets from reaching equilibrium, and the Fed is producing monumental amounts of new money, much of it secretively, off its balance sheet. Estimates of Fed off-balance sheet money creation are in the trillions of dollars.
Here are a few analyses of the magnitude of these Fed activities: ritholtz.com/blog, nowandfutures.com (this site also has a reconstruction of M3, the broad monetary aggregate that was discontinued by the Fed in 2006.)
4 comments:
Dr, Bair, Both links you provided were very interesting. And I was just thinking of what you said yesterday that the only way US is can get out of this mess is to have 100% of its principle in the book if I understand correctly. But it will rise a question that how are we going to stimulate the market if the money are just seating there? (yes, i agreed the banking giants are way too secretive, can't wait to see some real transparency in the banking business). I still think that almost half of the 2010 budget spend on government spending which President's focus on energy, science,and education section which would really help strengthening economy. Of course there's risks that the energy, and science field fail, but isn't that the "animal instincts" comes to place in this bulk move?
Thanks for your comment. The answer is that we would not be able to use monetary stimulus at all. That's good, because monetary stimulus is not capable of producing lasting economic growth. While it does produce growth, it also produces distortions which make the boom unsustainable.
I agree that distortion makes boom unsustainable, but without using monetary, what else can we use? (not everybody is able to work for free, hypothetically think that they do, aren't we going backward to communism eventually)
Work for free? No, I said we won't be able to use monetary stimulus, which means lowering interest rates or creating more money during a recession in order to stimulate the economy. We will still have a market economy that uses money as a medium of exchange. Giving up the fiction that monetary stimulus is a helpful tool will make the market function better.
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