Classic Posts: Understanding Short-Term Fiscal Policy

TW: Folks seem to be getting a bit sideways on fiscal policy still. I re-post this from March as I thought Rosenburg's comments were spot on. We MUST delineate between short-term fiscal policy and long-term fiscal policy, if not we WILL end up with very bad policy. The Hooverite conservatives are trying to lead us back down the path that made the Great Depression truly depressing. More to come after this post as well.

TW (from March 8th): Here is an economist's take, an economist without ideological agendas from either left or right. Is he concerned, most definitely.

From David Rosenburg at Merrill Lynch:
"Yes, the Fed’s balance sheet and the balance sheet of the federal government are expanding at record rates. But these reflationary efforts should be seen as a partial antidote, not a panacea, to the deflationary effects brought on from the unprecedented contraction in the largest balance sheet on the planet: The $55 trillion US household balance sheet. Based on what house prices and equity valuation have been doing this quarter, we are likely in for a total loss of household net worth approximating $7 trillion this quarter alone, which would bring the decline in consumer wealth to $20 trillion. This wealth loss exceeds the combined expansion of the Fed’s and government balance sheet by a factor of ten.That should put the reflation-deflation debate into perspective."

TW: In other words, you hear conservatives squealing about the inflationary impact of "trillions" of bailouts and stimulus. The problem with their concern is that the aggregate wealth destruction is measured in tens of trillions, the government bailouts and stimulus are merely efforts to mitigate the hugely deflationary impacts of that wealth destruction. What does wealth destruction mean, it means few buying discretionary goods, most buying cheaper food, clothing etc., no one taking risks in new businesses etc. The government is stepping in to try to keep the pump primed lest the flickering lights of our economy completely snuff out.

From Rosenburg cont.:
How we get any sustained inflation is totally beyond us
In addition to credit contraction, asset deflation, profit compression and employment destruction, we are also in a vicious inventory reduction phase in the manufacturing sector. If our forecast is correct, this would then suggest that the capacity utilization rate in manufacturing will make a new all-time low of 66.6% from 68% in January. The employment data also tell us that there is a very high probability that wages and salaries deflated -0.3% in February as well. How we end up getting any sustained inflation pressure, or backup in bond yields for that matter, as the economy moves further and further away from any semblance of “full employment” in either the labor or product market, is totally beyond us."

TW: There will be a time to worry a great deal about inflation. But one does not paint with the same brush all of the time. When the recovery commences the Fed and the federal government will have very challenging decisions to make regarding how hard and quickly to contract monetary and fiscal policy without snuffing out the burgeoning recovery. Will they make mistakes, very likely, BUT:

We are faced with a choice. Trust the Fed and Obama to act swiftly in the future to contain inflation or pursue the proposed contractionary policies advocated by Republicans that will almost certainly make the current MASSIVE demand contraction worse.