Thursday, January 15, 2009

The Stimulus Trap

The Weekly Standard with a great piece on the potential ineffectiveness of Keynesian economic models in today's current downturn (Thanks to reader Tim).
Pretty much everybody seems to agree that the economy needs stimulating. They agree on this because the United States has been in recession for more than a year and the outlook is bleak. There aren't a lot of options left to policymakers. In most recessions, the Federal Reserve increases demand by manipulating interest rates. But, in December, the Fed effectively lowered those rates to zero and lost a lot of its leverage over the economy. The nation's central bank now has to rely on other forms of monetary policy--mostly printing money--in order to help the United States pull out of recession. But that might not be enough.

By keeping interest rates so low for so long over the past decade, then lowering them some more after the recession hit, the Federal Reserve stumbled into a "liquidity trap." You get caught in a liquidity trap when monetary policy loses its effectiveness even though interest rates are at zero--just like today. It's as though the Fed has been dancing the limbo and has finally reached its limit. Rates can't go any lower to get money moving. The central bank has done all that it can do.

Let's put this into hip hop lexicon. Think of our economy like a crack whore. The feds have been artificially injecting liquidity into the market for years in the form of low interest rates and regulatory demands on banks to loan to dead beats. This created a huge boom in the business cycle and now that the economy is drawing down, it feels like a hangover.

It mirrors a crack whore in that it takes more and more crack to get the same high you use to get for $10.00.

Our economy is no different. The Obamamaniacs think that it's going to take trillions to turn around an economy that's been living on $300 billion deficits for years. Well it probably will until that next business cycle downturn... then it will take quadrillions or whatever denomination lot's of trillions are, to make another recovery.

To paraphrase Nancy Reagan, "Just Say NO!"

Now pass me the pipe.

2 comments:

Anonymous said...

The loss of leverage arguement also applies to government spending in addition to interest rates.

In the New Deal, the Kaynesian approach was to kick start the economy with increased govt spending. If it worked (and that point is debatable) it worked because government increase actually meant something. It was only 3% of GNP before FDR and grew dramatically. There was lots of room for govt to grow and to be that kick start.

Now, counting fed/state/city, the govt is 50%. If the govt doubles in size, it will BE the GNP. Today's economy is weak because the Kaynesian model has finally caught up with us. Now Obama wants more of it. God help us all.

Anonymous said...

Chairman Ben S. Bernanke, We Are on Our Way to Abolish Credit.

All of Our Economic Problems Find They Root in the Existence of Credit.

Out of the $5,000,000,000,000 given out to the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE got?

A Credit Free, Free Market Economy Is Possible.

Both Dynamic on the Short Run & Stable on the Long Run.

I Propose, Hence, to Lead for You an Exit Out of Credit:

Let me outline for you my proposed strategy:


Preserve Your Belongings.

The Property Title: Opt Out of Credit.

The Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

Asset Transfer: The Right Grant Operation.

A Specific Application of Employment Interest and Money.
[A Tract Intended For my Fellows Economists].


If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless?

Since credit based currencies are managed by setting interest rates, on which all control has been lost, are they managed anymore?

We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

The other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

It will be either awfully deadly or dramatically long.

A price none of us can afford to pay.

“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

- Henry A. Kissinger


Let me provide you with a link to my press release for my open letter to you:

Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!


I am, Mr Chairman, Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640