The huge fiscal and monetary stimulus dispensed in recent years has staved off the onset of chronic deflation. For now.
The deficits created by this spending would be inflationary only if the measures occurred in a period of full employment and created excess demand. That isn't the case in the US, where the large budget shortfalls are a response to private-sector weakness that has depleted tax revenue.
Indeed, even with persistent trillion-dollar deficits and huge monetary-easing programs, the slack we see in the economy reflects the huge size and scope of the offsetting deleveraging in the private sector that I noted in yesterday's column.
Monetary Stimulus: The Federal Reserve and other central banks have been extremely aggressive. First, the Fed pushed the short-term rates they control to almost zero - with little effect. Then it turned to quantitative easing, the enormous purchases of government bonds and other securities that have been tried by the Bank of Japan for years without notable success. The Fed, with its dual mandate to promote full employment as well as price stability, is using a very blunt instrument to try to create jobs.
The central bank can raise or lower short-term interest rates, and buy or sell securities. Those actions have little to do with creating more jobs. In contrast, fiscal policy can be surgically precise, aiding the jobless by extending and expanding unemployment benefits.
Mortgage Rates The Fed is now buying residential mortgage-related securities as a way to push down mortgage rates and spur housing. But the effect of these measures has been largely neutralised by a number of negative forces, including tight lending standards, low credit scores, "underwater" mortgages, uncertain job security or unemployment and the awareness of consumers that for the first time since the 1930s on a nationwide basis, house prices have dropped substantially and could do so again.
Nevertheless, the Fed is relying on five interlocking steps to increase job creation: First, the central bank buys Treasuries or mortgage-related securities. Second, the sellers reinvest the proceeds in assets such as stocks, commodities and real estate, pushing up prices. Third, higher asset prices have a real wealth effect by making investors feel richer. This, in turn, leads people to spend on consumer goods and services, as well as capital equipment. And last, that spending spurs production and demand for labour.
So far, it hasn't worked as planned. Despite recent improvements, the US unemployment rate, at 7.7 per cent, remains very high by historical standards, particularly more than 3 1/2 years after the trough of a recession. And cautious employers have turned to temporary workers who generally are paid less and are easier to dismiss than full-time ones.
Temporary, Limited Effects: Every round of easing by the Fed has been accompanied by a jump in stocks that lasted only until the next crisis in Europe or the US In addition, the gross-domestic-product bang per buck of new debt isn't what it used to be.
1.Aside from the economy, government should be concern on the welfare of the people first before anything else, besides it is the people who determine what economy will be at, whether it may be in good or bad state. It is because I is the people who are in control of the demand.