It has been almost 4 years since the US fell into the Great Recession and we have yet to see a strong recovery. One of the after-effects of the Great Recession has been the increased attentiveness to monetary policy. Attentiveness to monetary policy existed before the Great Recession but not to the degree seen today; since the Federal Reserve took unconventional steps in 2008 to fight the recession, it now seems like every single word or action coming of the Federal Reserve (Fed) is a do or die moment for the markets and the economy.
Well, I got bad news for all those who think monetary policy is the “Holy Grail” to our problems – it’s not. Unfortunately, this reliance on the Fed has diverted attention away from the true matter we need to concentrate on: fiscal policy. Despite what all the supporters of monetary policy say, the Fed is out of bullets. They dropped interest rates to 0% (to make borrowing more affordable), conducted QE1 which calmed markets by providing liquidity (“Credit Easing”), tried QE2 & Operation Twist (which aimed to bring longer-interests rates down) and attempted better communication measures (“Rate Easing”) as they committed to keeping interest rates near zero “at least through late 2014”.
Despite these actions taken by the Fed, we still see high unemployment and weak GDP growth. While parts of the economy are showing strength, the two most important measures of the economy show anything but strength. anything but that. Why can’t we solve our problems if monetary policy worked in the past? Market Monetarists (strong supporters of super aggressive monetary policy) will say that the Fed (and every major Central Bank) has failed to do its job. However, this is just wrong.
The main reason we are in an economic malaise is because we are stuck in a “Balance Sheet Recession” (termed by Richard Koo)....Read the rest at SMB|U
The Truth About Our Economy
by Jerry Khachoyan
My favorite line is the last: "We demand higher aggregate demand!"