Sunday, January 29, 2023

Analysis | United States: when the first power becomes the biggest debtor

The United States is facing a double economic crossroads due to the country’s high inflation rate and public debt, threatening the hegemony of the US dollar, as for the first time in history, the world’s largest monetary power is also the largest. is indebted. Much is said about inflation resulting from excess currency in the system due to demand for a limited number of goods and services.

In the US, money came into circulation due to the hyper-expansionary monetary policy of the country’s Federal Reserve (Fed), although it began with the financial crisis declared by the National Bureau of Economic Research (NBER) in December 2007, later becoming in 2020 before the prospect of deflation and the Japaneseization of the US economy due to the pandemic.

The Fed then cut its target for the federal funds rate, from a level of 1.58% in February 2020 to a level of 0.05% in April of the same year. In September 2020, the agency began purchasing massive amounts of debt securities through quantitative easing (QE) policy, which forced banks to lend more through the so-called credit channel. It was intended to boost aggregate consumption by reducing the cost of money and facilitating the payment of loans and increasing discretionary spending. Keynes’ idea was to awaken the animal spirit in American consumers, whose effective demand represents more than 70% of economic activity as measured in the country’s gross domestic product (GDP).

The result of this policy has been an increase in inflation in the United States from a level of 0% in April 2020 to a historically high level, an increase in prices that went from being accepted as temporary to permanent. The Federal Reserve began to systematically raise the fed funds rate in March of this year, although it had already reduced the pace of asset purchases in November 2021. Now the aim is to drain the liquidity from the system and curb the purchasing power of Americans, who are changing their purchasing patterns. Results from S&P 500 companies for the third quarter of this year show that demand is shifting from the goods sector to the services sector, led by the travel, bars and restaurants segment.

The Federal Reserve has a dual mandate. On the one hand, keep inflation at a level of 2% while maintaining a low unemployment rate around the natural rate of unemployment, the 4.4% estimated by the Congressional Budget Office.

The Fed’s current tight monetary policy ignores the negative impact on the labor mandate with respect to job destruction. However, the 3.7% unemployment rate for the month of November means that the agency is supported by a labor market that is at full employment and that can still withstand some destruction of jobs without causing a severe economic downturn.

However, the unemployment rate is a lagging economic indicator. According to the behavior of advanced economic indicators such as the Leading Economic Index (LEI), the shadow of an economic recession is already looming over the country by 2023, accompanied by the destruction of jobs and an inflation rate of over 2%. Conference Board, a decline in building permit claims from the US Census Bureau, an increase in weekly unemployment claims from the US Bureau of Labor Economics and, most importantly, because the 2 Treasury yield spread curve has inverted in 10 years.

Given this situation, the Fed is considering the possibility of helping with supply policies that help the production of goods and services, which have been severely hit not only by import tariffs from the People’s Republic of China, but also by breaking down. has been affected by. of input distribution chains.

In the seventies and under President Ford’s mandate, supply policy arose in the United States, stagflation occurred, and the Keynesian response of increased government spending failed to boost the economy. This new vision, along with other traditional measures to expand government spending, was put into practice under the mandate of President Reagan, who argued that reducing bottlenecks in production, reducing some taxes, and controlling activity would help the economy. Production will increase and the supply of goods will expand. and services, all of which will put downward pressure on prices. The result was historic economic growth and an increase in the standard of living of households.

In Europe, there is a similar economic situation, though not the same, partly due to the European Central Bank’s strategy of being too long-term, with a monetary regulation that has also had unintended consequences in the short term.

Economic history has taught us that, in economics, any reform that is made, no matter how subtle, can uncover consequences for the future that are not foreseen in the economic model applied at every turn. As with Reagan’s regulation and its deregulation. Desired Results.

Maria Lorca-Susina Has PhD in Economics. Professor at University of Miami

Nation World News Desk
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