The End of Monetary Policy (Cont)
That Pesky Budget ThingDeveloped governments around the world are running deficits. France will be close to a 4% deficit this year, with no improvement in sight. Germany is running a small deficit. Japan has a mind-boggling 8% deficit, which they keep talking about dealing with, but nothing ever actually happens. How is this possible with a debt of 250% of GDP? The US is at 5.8% and the United Kingdom at 5.3%, while Spain is still at 5.5%.Let’s focus on the US. Everyone knows that the US has an entitlement-driven spending problem, but very few people I talk with understand the true nature of the situation, which is actually quite dire, looming up ahead of us. In less than 10 years, at current debt projection growth rates, the third-largest expenditure of the United States government will be interest expense. The other three largest categories are all entitlement programs.
Social Security, Medicare, and Medicaid now command nearly two-thirds of the national budget and rising. Ironically, polls suggest that 80% of Americans are concerned about the rising deficit and debt, but 69% oppose Medicare cutbacks, and 78% oppose Medicaid cutbacks.
At some point in the middle of the next decade, entitlement spending plus interest payments will be more than the total revenue of the government. The following chart is what will happen if nothing changes. But this chart also cannot happen, because the bond market and the economy will simply implode before it does.
A Multitude of SinsMonetary policy has been able to mask a multitude of our government’s fiscal sins. My worry for the economy is what will happen when Band-Aid monetary policy can no longer forestall the hemorrhaging of the US economy. Long before we get to 2024 we will have a crisis.And these projections assume there will be no recession within the next 10 years. How likely is that?
What happens when the US has to deal with its imbalances at the same time Europe and Japan must deal with theirs? These problems are not resolvable by monetary policy.Sometime this decade (which at my age seems to be passing mind-numbingly quickly) we are going to face a situation where monetary policy no longer works.
If we were to enter a recession with rates already low, what would dropping rates to the zero bound again really do? What kind of confidence would that tactic actually inspire? And gods forbid we find ourselves in a recession or a period of slow growth prior to that time. Will the Fed under Janet Yellen raise interest rates if growth sputters at less than 2%?An even scarier scenario is what will happen if we don’t deal with our fiscal issues. You can’t solve a yawning deficit with monetary policy.Further, at some point the velocity of money is going to reverse, and monetary policy will have to be far more restrained. The only reason, and I mean only, that we’ve been able to get away with such a massively easy monetary policy is that the velocity of money has been dropping consistently for the last 10 years. The velocity of money is at its lowest level since the end of World War II, but it is altogether possible that it will slow further to Great Depression levels.
For Keynesians, we are in the Golden Age of Monetary Policy. It can’t get any better than this: free money and low rates and no consequences (at least no consequences that can be seen by the public). This will end, as it always does…
Not with a Bang but a WhimperWill we see the end of monetary policy? No, policy will just be constrained. The current era of easy monetary policy will not end (in the words of T.S. Eliot) with a bang but a whimper. Janet or Mario will walk to the podium and say the same words they do today, and the markets will not respond.
We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar…
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
– T. S. Eliot, “The Hollow Men”
Current market levels of volatility and complacency should be seen as temporary. Plan accordingly.
http://www.mauldineconomics.com/frontlinethoughts/the-end-of-monetary-policy======================================================
I mostly concur, nuff said!