Why US stimulus can’t fix unemployment
Why US stimulus can’t fix unemployment

A great post by Richard Alford on Naked Capitalism showing why the US is in a mess and can’t stimulate itself out of it. The key paragraphs being:

“From 1996 to 2001, the effect of the growing trade imbalance on output and the labor market was masked by the irrational exuberance of the tech bubble and the transitory increases in investment and consumption that it drove. When the tech bubble burst, the drag from the trade deficit remained and the US experienced a recession even though final sales to domestic purchasers exceeded potential output.

Post the crash of 2001, the US authorities employed economic policy accommodation to close the output gap. The Fed lowered the targeted Fed funds rate to 1%. It stayed there for 18 months and was then ratcheted up slowly over 17 FOMC meetings. The private savings rate approached zero. The budget deficit grew and the cyclically adjusted fiscal budget became decidedly negative and has remained so.

The stimulus narrowed the gap. However, there was a dark side to the attempt to achieve full employment via stimulative domestic policy. Given the trade deficit in 2005 (the only year in which the output gap was closed), US based economic agents had to demand/spend on final goods and services $1.0572 for every $1.00 of income. Full employment was accompanied not only by an unsustainable external deficit, but also unsustainable asset prices, private debt levels and levels of consumption (and savings) relative to income as well as higher public debt levels. When the public’s willingness to increase its debt load waned as real estate prices fell, consumption, economic activity and employment fell along with it. We are now experiencing balance sheet recession and existing debt levels appear to be a barrier to increased private and public sector debt-financed demand.

Most troubling, but not surprising, the trade deficit is growing again and is unsustainable at about 3.7% of GDP. The external imbalance is not a temporary phenomenon. The simple and sad fact is that an unsustainable trade deficit implies that full employment levels of GDP are also unsustainable”.

The malinvestment needs to be removed. People and money need to be put to use producing things people actually want to buy. That is the only realistic way for the US to get out of the mess it is in. Anything else is a mirage and if it delays the realignment through debt funded consumption, it makes the eventual reckoning worse. Money spent bailing out bankers and used by them on bonuses was money America needed to feed its people. Already 1 in 8 Americans, almost 40 million are on food stamps. They have a long way to go, once they start moving in the right direction.

  1. 999922 247565Yeah bookmaking this wasnt a high risk determination outstanding post! . 144090

  2. 643568 502326I got what you intend,bookmarked , really good internet web site . 656532

  3. 989465 424906Merely wanna input which you have a quite good internet internet site , I really like the pattern it in fact stands out. 270331

  4. 750521 167205I certainly did not comprehend that. Learnt one thing new today! Thanks for that. 313117

  5. 68157 828055bless you with regard to the specific blog post ive truly been searching with regard to this kind of advice on the net for sum time these days hence with thanks 897364

  6. 442545 96464I gotta bookmark this internet internet site it seems really valuable invaluable 767429

  7. 508765 850485I believe this internet web site has some rattling great information for every person : D. 77400

  8. 335569 957430This internet web site is actually a walk-through for all with the information you wanted about this and didnt know who to ask. Glimpse here, and you will undoubtedly discover it. 943956

  9. 359913 690327This will likely be a fantastic internet web site, will you be involved in performing an interview regarding how you developed it? If so e-mail me! 816900

  10. 737471 322314I admire the valuable facts you offer inside your articles. I will bookmark your weblog and also have my children verify up here often. Im really positive theyll learn plenty of new points proper here than anybody else! 471258

  11. 186620 290651Hello super schner Webblog den ihr da habt. Bin gerade ber die Google Suche darber gestolpert. Gefllt mir echt super gut. macht weiter so. MFG Martina 966523

  12. 317420 336763The leading source for trustworthy and timely health and medical news and data. 783442

  13. 537605 618781Really properly written story. It will likely be valuable to anyone who usess it, including yours truly . Maintain up the excellent function – canr wait to read a lot more posts. 247057

  14. 275603 386907Outstanding post, I feel weblog owners need to larn a whole lot from this weblog its actually user genial . 181261

  15. 295000 816798Hello! I would wish to supply a large thumbs up for your excellent info you could have here about this post. Ill be coming back to your blog site for further soon. 469236

  16. 872117 248367I think this is among the most vital info for me. And im glad reading your article. But wanna remark on few general things, The website style is perfect, the articles is really great : D. Good job, cheers 23762

  17. 973923 289114Extremely interesting info!Perfect just what I was looking for! 170921

  18. 405708 512381Glad to be one of many visitants on this awing web site : D. 743255

  19. 984989 26006Spot lets start on this write-up, I seriously believe this remarkable internet site requirements considerably far more consideration. Ill far more likely once once again to read a terrific deal far more, a lot of thanks that information. 393375