By Warren Mosler, Mosler Economics
I’m thinking it’s about that time for portfolio managers to buy stocks and go play golf for a few years, with the following very caveats:
1. A serious spike in crude oil/gasoline prices that undermines consumption
2. The euro zone could break down socially under the stress of continued austerity
3. Congress opting for ‘meaningful’ proactive deficit reduction
But apart from that it looks like relatively clear sailing to me. The Republicans are now softening on revenue increases to get past the fiscal cliff. And in any case the fiscal cliff may already be up to 50% discounted, as business has slowed due to delayed contracts, etc. & with top line growth still remaining modestly positive as the cyclical housing ‘recovery’ begins its multi-year upward grind, providing a powerful ‘borrowing to spend’ force for growth. I call it a drop in ‘savings desires’ as borrowing is in fact ‘negative savings’. This is fundamentally supported by continuing federal deficit spending that, while down from the peak, is still looking more than high enough to support a growing credit structure.
And the 4 years of ‘larger than ever’ federal deficits have added exactly (to the penny) that much in dollar net financial assets to the global economy, with much of that being added here domestically. This is evidenced by the full recoveries, and then some, of macro debt service ratios of all types. In short, ‘savings’ has been, for all practical purposes, more than sufficiently restored for a ‘normal’ recovery. This kind of underlying strength will quickly cause the Fed to re-evaluate policy as unemployment drops towards 7%, leading to a ‘normalization’ of policy, which means a fed funds rate at a ‘normal’ premium over ‘inflation’ for a ‘neutral monetary policy.’ In fact, as this happens, the higher rates from the Fed further support the expansion via the interest income channels.
The output gap is wide enough for this to go on for a long time without excess demand issues, again with the caveat of crude oil. Growth has already caused the federal deficit to come in lower than expected, which is helping put off proactive deficit reduction efforts. Yes, eventually, the automatic fiscal stabilizers will bring the deficit down too far for it to support the credit structure, and serve to end the cycle. But this is WAY down the road.
The first Obamaboom came from the ‘stimulus’ which wasn’t nothing, but was far too weak to remove the sudden drag on demand from the private sector credit contraction. The ‘crime against humanity’ was not implementing the likes of my proposed ‘payroll tax holiday’ in mid 2008 to support demand at full employment levels at that time. Instead, the govt allowed demand to collapse/output gap to widen. This did not have to happen. It was a total failure of govt.
Also, timing is also important, so mind the technicals!