In recent years, the United States has experienced economic growth, low inflation, debt and deficit growth, low interest rates and rising stock markets simultaneously. Classical economic theory tells us that the presence of these economic phenomenas are incompatible. In fact, economic history tells us that they have not coexisted historically, except recently, and I believe that if this has been because of the expansionary activity of the monetary policies promoted by the Fed.
Do you think that this scenario of simultaneity of economic growth, low inflation, debt and deficit growth, low interest rates and rising stock markets is going to be extended much more over time and what will be its final consequences?
Economic history and theory are important areas of study, but they are not 'oracles'. Trying to flatten economic conjuncture by central monetary policy is a risky and palliative game; it is a mental product of methodical linearity to straighten the cycle. Central banking will always be under this 'divine temptation'; the general result will be no soft landing, a continued meltdown and deepening of the existent crisis ( a strong cold will end up in a strong pneumonia). Intervening into cycles is politbureau mentality: applying the square instead of the wheel.
Paul: The economy of the United States has been performing very well for a very long time. The USA economy has very low unemployment, low inflation, and steady positive GDP growth. The stock market is performing well. The Fed and President Trump have done a fine job instilling confidence in the USA consumers and producers. We should enjoy and celebrate our strong economy!
The future looks bright in the USA economy. There is no reason to worry about the future. This expansion phase has lasted 10 years! Yes, we (USA) are due for a recession, but let's enjoy the good times while we can.
Pedro,
I do not see the phenomenas you are describing as simultaneous. The present situation is rooted in the 2008 crisis.
First, economic growth is recent in the US and is a consequence of President Trump policies of lowering taxes and reducing regulation. Before, the US was stuck in a slow recovery.
It is this slow recovery that has forced the fed into a long term zero interest rate policy that is very difficult to get out of and therefore has pushed stock market prices very high.
Inflation has remained subdued because of the US imports from countries with very low wages and the will of previous governments to accept huge external deficits.
So it is an odd combination of several factors that give the appearance of classic economic laws becoming obsolete.
I suspect the pendulum will come back and I would guess that the first sign of it would be an increase of inflation.
So ... we can conclude that the entire monetary theory is simplified that every time there is a crisis, the money supply is expanded by issuing currency until the markets recover their previous levels. We all know that the public debt of most western countries is unpayable.
- Badges
- Science topic