The problem with economic policy

M

Mav88

is that it assumes that fiscal and monetary policy can overcome most any crisis, well IMO. As I read article after article on fiscal and monetary strategies, I wonder if people have forgotten that economics at its foundation is about the production of goods and services that other people want. Maybe I'm speaking to the wrong crowd since traders don't do that.

I don't see that fundamental improving in the US, in fact I see government actions further undermining it. For example the treasury market has become the fixiation of lots of folks. Arguments fly back and forth about whether or not treasuries will collase from here or stablize due to the massive amounts of liquidity. All well and good, but really, so what about all these governments and financial institutions trading financial agreements? It produces what it the end all by itself?

At some point there needs to be large increases the real organic output to underpin the financial system, however:
- Unions are proven productivity busters but are being bolstered by the administration
- demographics says that we will have an ever increasing ratio of non-workers to workers as well as society destabilizing cultural shifts
- we have ever hostile attitudes towards wealth creating capitalism (it's too 'white western male' for one thing) and the culture that supports it, all the while places like china are embracing it
-we have a youth that is trained to love social welfare and at the same time disliking math and science
-The political party in power is concerned about consolidating their power and advancing their agenda. I'll clue you in, it isn't about wealth creation, especially the high growth wealth creation we need to pay off this debt.

What will all the fiscal and monetary maneuvering produce in the end? I predict tears
 
Quote from Mav88:

"... At some point there needs to be large increases the real organic output to underpin the financial system, however:
- Unions are proven productivity busters but are being bolstered by the administration
- demographics says that we will have an ever increasing ratio of non-workers to workers as well as society destabilizing cultural shifts
- we have ever hostile attitudes towards wealth creating capitalism (it's too 'white western male' for one thing) and the culture that supports it, all the while places like china are embracing it
-we have a youth that is trained to love social welfare and at the same time disliking math and science
-The political party in power is concerned about consolidating their power and advancing their agenda. I'll clue you in, it isn't about wealth creation, especially the high growth wealth creation we need to pay off this debt.

What will all the fiscal and monetary maneuvering produce in the end? I predict tears
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Correct on all points!

And all of the bailouts, backstopping of failed business errors and models plus this shift toward Socialism and "redistribution" will only hasten the demise of the USA.

What about"... [needed] large increases the real organic output to underpin the financial system?..." Unless the government does an "about face" and SOON (don't see that happening, sadly) we have about as much potential as the proverbial "snowball's chance in Hell"...
 
By definition, economic policy works on a relatively short horizon (arnd 5yrs), as it's impossible to model the state of the economy and the effects of policy further out.

The other factors you're referring to act over a much longer horizon and I don't think economic policy can hope to address these systemic issues. Instead, I think it's just supposed to ensure orderly functioning of the mkt and, at least in theory, the mkt will then take care of everything else.
 
Great posts guys.

I will also add my two cents... I agree with the short-term view of fiscal or monetary policies. All politicians that write legislation serve certain year teams. Even with the high incumbency rates, every politician has a very short-term view. Politicians will always support something that will help them get re-elected rather than support a policy for the long-term. So they support legislation that may have positive short-term effects.

The Fed is a good example (no re-election but support of Congress/President). For over a decade Greenspan continually lowered interest rates, increased the money supply, encouraged a excessively consumer economy, put people in great debt, etc.

Now the bubble is bursting... the dollar has been losing value... commodities (gold) are going higher (again) and there is a real fear of inflation... Japanese style.

But many people love Greenspan because he helped create the bull markets by lowering interest rates. What happens if there is a bigger bubble than the tech boom?
 
I thought fiscal policy was supposed to be long term? Doesn't it have to be because of all the debt it is assuming?
 
Quote from Mav88:

I thought fiscal policy was supposed to be long term? Doesn't it have to be because of all the debt it is assuming?
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No, I think its side effects (debt burden) are long-term, but the issues it's designed to address and its direct effects are short-term.
Quote from monty21:
But many people love Greenspan because he helped create the bull markets by lowering interest rates. What happens if there is a bigger bubble than the tech boom?
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As one former member of the Bank of England's MPC said, 'Bubbles are lovely!'. There's a very strong political incentive to create bubbles, as you mentioned, but one could argue that they're almost part of human nature. The best we can hope for is that the bust is not too painful and that every bubble does lead to a tangible increase in productivity, like the tech boom.
 
Quote from Martinghoul:

No, I think its side effects (debt burden) are long-term, but the issues it's designed to address and its direct effects are short-term.

As one former member of the Bank of England's MPC said, 'Bubbles are lovely!'. There's a very strong political incentive to create bubbles, as you mentioned, but one could argue that they're almost part of human nature. The best we can hope for is that the bust is not too painful and that every bubble does lead to a tangible increase in productivity, like the tech boom.
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Sure... bubbles are cyclical... just as the business cycle.

But politicians can make these bubbles much more dramatic than the free market can. Greenspan's continual lowering of interest and the growth of the money supply resulted in more capital available. The tech boom wouldn't of been so dramatic had there not been such capital available.

Now with the real estate/sub-prime mess... it was government that initially encouraged banks to give loans to lower income families. Clinton signed legislation whereby FNM and FRE were supposed to do just that. Then it obviously got even more disastrious with the introduction of derivatives. But when all is said and done, the government started the chain. I laugh when politicians blame the lack of regulation.

I don't think the S&P 500 could correct itself by 50% in one year when it is based on a free market bubble. When government interferes in the economy, however, than such huge decline is possible.
 
Quote from monty21:

Sure... bubbles are cyclical... just as the business cycle.

But politicians can make these bubbles much more dramatic than the free market can. Greenspan's continual lowering of interest and the growth of the money supply resulted in more capital available. The tech boom wouldn't of been so dramatic had there not been such capital available.

Now with the real estate/sub-prime mess... it was government that initially encouraged banks to give loans to lower income families. Clinton signed legislation whereby FNM and FRE were supposed to do just that. Then it obviously got even more disastrious with the introduction of derivatives. But when all is said and done, the government started the chain. I laugh when politicians blame the lack of regulation.

I don't think the S&P 500 could correct itself by 50% in one year when it is based on a free market bubble. When government interferes in the economy, however, than such huge decline is possible.
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Agreed... Politicians have the power to, invariably, make things worse, which is why true independence of the Central Bank is as necessary as it's impossible to actually achieve. It's no wonder Jean-Claude keeps warning politicians against pro-cyclical fiscal policies.

However, my personal pet theory is that excess capital comes first and represents an exogenous shock to the financial system that results in a bubble. In 2000s, it was the baby boomers' savings that needed to find a home and ended up inflating the tech bubble. In a similar way, the current bubble was initiated by Chinese savings.
 
Ther should also be some sort of independent control over fiscal too. There needs to be an adult in charge of the checkbook.

Bubble economies, such as we have now, simply cannot have happy endings as fiscal and monetary decouple from economic reality. Obama is telling everyone to save and not waste all the while trying to urge people to buy homes again and stimulate the economy. Have they no clue that their political goals of reinflation do not line up with the real world? Politics will not allow cuts in medicare and medicaid, or changes in SSI. Economic reality tells us they are unaffordable. Democracy does not work I'm afraid since as mentioned the political pressure for the short term is just too strong.

Globalism and Socialism did quite a number on the US.
 
It is possible that the very real problems in the U.S. mentioned here can not be solved by attacking then directly because while the structure of government would be capable of doing that, the nature of the U.S. government is not. Perhaps what is needed, therefore, is a sea chance in the nature of government so that it can have a longer term outlook and not be interfered with by narrow, short-term interests. To that end, I would think, as a first step, that the First Amendment to the Constitution needs to be overhauled, because this has so far proved to be an insurmountable barrier to meaningful campaign funding reform.
 
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