Current Economic Update

Ryan Herzog, Ph.D. Assistant Professor of Economics

Gonzaga University04/10/2010

Prepared for Beta Alpha Psi

Current Economic Update

Current Economic Update• Fiscal Policy– Are we digging too large of a hole?– Is the ARRA working?– Where are the jobs?

• Monetary Policy – Where do we stand with TARP?– Was it bad policy, bad regulations, or something else?– Is high inflation around the corner?

• International Issues– What about our large external deficits?

Key Variable - Projections

Fiscal Debt - Projections

Government – Interest Payments

ARRA Effectiveness

Overview of Fiscal Policy

• Should we be concerned about added spending?– We need to return deficits to manageable levels.– The current path of government spending will crowd

out private investment through sharp increases in interest rates.

• Where will the money come from and at what cost?– How dependent will we be on external funding?

Job Creation

• Have recent stimulus packages been sufficient at creating jobs?– Extensions of unemployment insurance have helped

but have not been enough.– Are will missing the root of the problem?

Unemployment

Construction and Manufacturing

Structural Concerns

Jobs• The recession has simply magnified and sped up

job losses in the manufacturing sectors.– The construction industry provided alternative

employment.• We need to focus on retraining 5 million workers.• Extending unemployment compensation does

not address the structural problems in the manufacturing industry.– Workers are searching for jobs that do not exist or

will not exist in the near future.

Monetary Policy

• What caused the separation between short-term and long-term interest rates?

• Are we setting ourselves up for a period of high inflation (is stagflation possible)?

• Where do we stand with TARP?• Should we try and pop bubbles?

Short-term and Long-term Rates

Nonresidential Investment

Capital Inflows

Money Supply

Quantitative Easing

TARP

• Where do we stand?• Did it really cost $700 billion like some claim?

Monetary Policy - Overview

• Large inflows of foreign capital made it difficult for the Fed to control long-term interest rates

• We don’t have good mechanisms in place for determine asset bubbles– The early euphoria phase is well liked

• Will the Fed be able to unwind their balance sheet before inflation risks mount?– The Fed is paying interest on reserve holdings which

will allow them the time to take reserves out of the system

International Issues

• Prior to the crisis we were concerned over the growing external deficits.– What is happening today?

• Should we be worried about a declining dollar?– Will it help the manufacturing sector?

• What about China?

Balance of Payments

Foreign Investment

• Foreign inflows have been into U.S. treasury securities– China: $889 billion– Japan: $764 billion– Oil Exporters: $218 billion– United Kingdom: $206 billion

Overview

• Prior to the crisis– The current account balance had many

economists predicting a hard landing, a complete loss of external financing.

• Post crisis– The depreciation of the dollar has caused exports

to decrease less than imports.

Concerns Going Forward

• Financing the Government Deficit– In 2001, $1 trillion was financed by foreigners

• $378 billion by Japan, $78 billion by China– In 2009, $3.6 trillion was financed by foreigners

• $889 billion by China, $764 billion by Japan

• Can the Fed wind down their balance sheet?– In 2007, they had $850 billion in liabilities– Today they have $2.3 trillion in liabilities

• How long will the flight to quality last?– Low interest rates and cheap financing!

Disclaimer