Wednesday, September 19, 2012

Chicago Fed President Explains Why Fed Moved To Stimulate Economy

The President of the Chicago Fed defended the Fed's decision to purchase more longer term securities in this report.  His description of the global economic outlook, and a benign outlook for inflation, provided the rationale for the his vote at the FOMC meeting.  US corporations are experiencing slower growth in the rest of the world, particularly in Europe.  Moreover, the US consumer is no longer in a position to compensate for weak demand in Europe and the rest of the world.  These forces interact with each other.  Slow growth in one region affects growth in the other region.

The recession in Europe is bad for the global economy, and the crisis in the eurozone is not easy to resolve.  The normal path for countries, such as Spain and Italy, to deal with slow growth would be to deflate its currency.  That would increase exports and decrease imports from the rest of the eurozone.  The common currency makes that impossible.  The only available solution is price and wage deflation, which takes longer to accomplish, and which can lead to social unrest.  Any solution in Europe will require economic growth someplace in Europe.

The economic problems in the US are also complicated by the political stalemate that has resulted in the pending fiscal cliff.  That problem cannot be solved prior to the election, and it may not be solvable after the election.  Current law will cause income taxes to rise and government spending to fall.  That could easily lead to a US recession.  Political dysfunction in the US exacerbates our economic problems.

No comments:

Post a Comment