The monetary easing during the financial crisis has focused on: (a) reducing the short-term cost of the immense sovereign debts, (b) subsidizing financial institutions to bring them back to health, and (c) replace some of the money eliminated by reduced velocity (Focus on wealth effects on monetary supply seem secondary).
I would also suspect that some inflation fueled by negative interest rates (held too long) -- would be designed to further aid debtors.
With a bit of confidence restored in the financial system, this Great Recession was ended via neo-Keynesian fiscal stimulus.
But this stimulus has focused on short-term expenditures (albeit with some thought as to potential long-term investment benefits -- e.g., build-out of infrastructure).
We must now consider the longer-term impact of deficit spending -- in the U.S., Europe and others.
Asset Prices (particularly real estate related) and currency imbalances have been at the crux of the financial crisis.
The future will be determined by how well we are able to: (1) wean ourselves from the current, extreme expansionary policies, (2) reinstate adequate capital formation with manageable private and public sector LONG-TERM capital costs, and (3) truly begin to make inroads into addressing the real costs of fossil fuels, over-population, and political, social, and resource inequities.
For the first two, I would argue that there are COMBINATION policies that can: (a) restore short-term interest rates to some normal real rate, (b) mitigate inflation momentum, (c) preserve quantitative easing measures, (d) make large improvements in deficit spending, and (e) increase certain fiscal spending to mitigate economic tightening effects.
(a) to (c) are relatively straightforward policy measures. For (d) and (e), governments should consider that:
- Increasing the retirement age will only have a secondary effect on reducing consumption (and will have a significant positive productivity effect).
- Reducing vacation and retirement benefits, in many cases for public sector employees, will also increase productivity and not immediately reduce consumption.
- In fairness, countries like Greece really needs to improve its collection of taxes from the upper class in order to make all of this not so regressive. They can go further by addressing the entitlements amongst the private-sector unions.
- For other belt-tightening measures that do have a negative consumption effect, governments can expand certain fiscal stimulus measures in the short-term. Those measures with a MULTIPLIER effect should be emphasized -- including programs for first-time home buyers, cash for clunkers, etc.
It is very easy, particularly for liberal governments, to use the financial crisis as an excuse to spend and put off hard-decisions on entitlement programs.
But governments must have the resolve and creativity in revitalizing the economy while aiding long-term investments with reduced long-term capital costs. We are already seeing dramatic currency fluctuations and capital flows -- with imbalances that we have not even begun to identify.
Hopefully we will do the right thing . . . soon.
As for energy, population and inequities, it would seem:
- The BP oil spill would seem to be an additional catalyst in a move toward renewable energy and energy efficiency.
- Gates/Buffet and others seem to have initiated a new era of philanthropy.
- Americans voting for an African-American President with a Muslim name has far reaching impact within and outside the U.S. Just today, the U.S. and Russia efficiently resolved the spy issue rather than make a drawn-out Cold War affair. And the Israeli Prime Minister looked unusually nervous to meet the President this week - not that I think he should. This is just a few of this weeks events, of course -- and not because of BO in particular, but because the people and king makers decided that 2008 was the right year.
- The population thing seems to have taken a back seat. Countries like Japan and Korea with low birth rates are trying to increase baby production and immigration (at least in Korea and seemingly the U.S.). It would seem that most of the farmers in China have already migrated to the cities -- but the idea that China and India and Indonesia and Nigeria will add multiples to the current middle class of over consumers . . . is pretty scary.
Go Commodities and Shipping!
