I thought we were supposed to be borrowing and spending more to “stimulate the economy.” Now we find that the Secretary of the Treasury of the United States of America, the very man who’s urging us to do just that isn’t doing his share….he’s flying coach. What a selfish bastard, when he could be “stimulating” the airlines by flying first class.
Of course, cutting consumption and increasing savings is the rational response to the crisis, despite the fact that the administration is telling us to do the opposite. But at least they ought to get their story straight.
Chicago’s John Cochrane has some helpful comments in “Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?”
A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.
The Cochrane piece is excellent.
For a few relevant numbers see UCSD’s James Hamilton’s posts on Econbrowser.
http://www.econbrowser.com/archives/2009/03/money_creation_1.html
In the above one he observes that once (if?) recovery begins, the Fed will have to finesse a timely monetary contraction as the monetary stimulus it is pursuing implies a rapid doubling of the level of prices (hyperinflation).
And then in this one:
http://www.econbrowser.com/archives/2009/03/the_feds_new_ba.html
he discusses the dangers of giving the Fed power to direct investment flows — politicizing investment. Also makes the point that each additional trillion dollars in deficits would require a one-year doubling on income tax rates to pay off, something that is politically unlikely to happen.
IMO, we are heading rapidly towards a sovereign debt crisis and Zimbabweanization of the USD.
I worry more about a sudden financial disaster for the U.S. now than I have in the past, but Steele’s figures provide little evidence of the problem. While it is impossible to pay off the national debt in one year, avoiding fiscal disaster simply requires that the interest be covered. Tax increases sufficient to cover the intererest on a trillion dollar increase in the national debt are possible.
A single doubling of the money supply does not create hyperinflation. Not that a doubling of the price level over a couple of years wouldn’t be much worse inflation than the U.S. has faced recently. More importantly, it just won’t be that difficult to engineer a “monetary contraction” to reverse the incease in reserves if banks actually start to lend them out. It is true, however, that the Fed has a lot of questionable assets (unlike usual) so that it might require the Treasury to sell bonds and hold the funds at the Fed (like they did earlier this year.) In other words, an implicit fiscal bailout of the Fed.
The more realistic difficulty is that they will get it wrong. And so, there could be some inflation. Or, they really well choke off the recovery spending.
But I really think it is foolish to treat changes in the monetary base as permanent so that.. what.. first the price level doubles, and then, the Fed destroys money enough to reverse the price increases.
The long run fiscal picture for the U.S. is bleak because of health care costs for retiring babyboomers. The increase in the explict national debt that has occured and continues, doesn’t help. The reason to worry about sudden financial disaster is that if people began to believe that inflationary (or explicit) default will occcur when the financial pressure becomes extreme (when otherwise taxes must be massively increased or else spending cut,) then the nominal interest rates demanded now could skyrocket. So, the “need” to either raise taxes or cut spending or inflate would move from 20 years in the future to tomorrow.
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