Is the Great Depression the wrong analogy for policy makers?

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annarborgator
Posts: 8886
Joined: Sun Jun 17, 2007 5:48 pm

Is the Great Depression the wrong analogy for policy makers?

Post by annarborgator »

The Fed is headed to the zero mark, with another 50bp almost certain this week. It is widely expected that they will give some guidance as to their next steps, pointing us in the direction of an explicit policy of quantitative easing. Fed policy, as well as fiscal policy, assumes that the Great Depression is the most accurate analogy. This assumption ignores the external position of the US, which stubbornly refuses to adjust. If that failure to adjust is relevant, then recent Dollar stability was simply a head-fake. We should see pressure on the Dollar and, ultimately, Treasuries. Policymakers could adjust, but would they? With pursuit of the Great Depression case as the baseline scenario, it seems prudent to keep in mind the risk that this is not the relevant analogy for the US, and that policymakers are not prepared to accept such a possibility.
http://economistsview.typepad.com/economistsview/2008/12/fed-watch-what.html

The current account deficit is noted as a distinction between our current mess and the GD. Some say it doesn't matter, others seem to worry it will increase pressure on the dollar and treasuries as we ramp up our quantitative easing. I dunno.
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IHateUGAlyDawgs
Posts: 8155
Joined: Sun Jun 17, 2007 6:57 pm

Is the Great Depression the wrong analogy for policy makers?

Post by IHateUGAlyDawgs »

This article touches on the deficit a little (it's mostly about Obama's domestic plan) - basically says it may be necessary to let the deficit run in the short run, but needs to be addressed before too long.

http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12773148
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