Friday, January 18, 2008
the bush stimulus plan
i won't go into the details, but i really tend to think of economic and monetary outcomes such as deflation as less reliant on policy decisions (or who makes them) than the zeitgeist in which the decisions are made. all policy is reactionary -- we're certainly seeing that now -- and shaped by the context of events.
the reaction now is of course to inflate/reflate as best they can -- but the spirit of events will intervene upon plans and ultimately chart the course. reflation could easily be curbed/halted by an international debt repudiation. or (more likely at this point) the reflationary measures the government undertakes could simply end up insufficient in scope and timing to counter credit contraction from a truly massive high.
i won't pretend to know the outcome, of course. but i do suspect that reflationary measures will be surprisingly ineffective in the united states going forward -- indeed the primary beneficiaries will be overseas, as money supply continues to migrate to asia. i think in some respects that aspects of secular deflation began as early as 1998, and that reflating against the tide using credit expansion is becoming harder and harder almost regardless of the policy measures taken.
for example, to a considerable extent, what bush is proposing could be quite deflationary.
the idea is to give money to downscale consumers and have them spend it. that's great politically, but it's perhaps poor economic intuition.
the united states is experiencing a credit overload and revulsion, particularly among the consumer class. this is still in an early stage, but i would wager that by june recession will have deepened and people will be actively conserving (relatively speaking, of course). if you hand them $800 in that mindset, their use of the money is not going to be to blow it on three ipods.
if they don't need food, many will pay down their credit card or send it to their mortgage servicer. and the effect will be to reduce the velocity of money (or money multiplier), which will serve to slow economic activity yet further. for those who use it to buy food, i'd suggest they're already defaulting on debts -- which is another, more sudden form of slowing money. those who don't have debts to pay or food to buy will likely stuff it in a bank -- where the bank can sit on it for them, raising their reserve and capital ratios.
deflation in the aftermath of a credit revulsion is a very difficult problem for government to solve with stimulus. they will try what they can, but there's no guarantee that it will work. for my money, a better use of $145bn would be to recapitalize weakened american banks -- but that of course has far fewer political fig leaves to hide behind.