Federal Reserve: no supeman

Recent meeting at Jackson's Hole of central bankers and economists proved that they disagree on how to support economic growth.  Trichet will continue on fiscal austerity while the US is contemplating another stimulus program.

Like I stated in my previous blog, Chairman Bernanke at the Fed is running out of options.  There is very little he can do, except for controlling expectation and mentioning words of encouragement about the economy.  Policy of buying long term treasuries will have minimal effects on economic growth.  There are other dynamics that are effecting the U.S. economy like the rising influences of China and India.

Second Estimate of 2Q GDP

"Second Estimate" 2Q GDP increased at an annual rate of 1.6% from the 1Q to 2Q.  1Q GDP increased at 3.7%.

The economy is losing some steam as we are approaching the end of the fiscal and monetary stimuli.

Many Keynesian economists like Krugman and Stiglitz are advocating for a second fiscal stimulus program.  I am not sure, under the present political environment, if the program will be popular under the mid-term election this year.

Fed Summit at Jackson's Hole

Federal Reserve Chairman Ben Bernanke will give a presentation on "Economic Outlook and the Federal Reserve's Policy Response" at Jackson's Hole this Friday.

Hopefully, he will give us some clues as to the extent of the quantitative easing with respect to the balance sheet.

Again, I think the fed is at the end of using its tool box.  There is so much monetary policy can do in this economic environment with respect to the unemployment problem.  Adding more liquidity to the economy will not do much; there is not policy traction.

The labor market is weak because the skill level of the jobs available does not match the labor force of the American workers.  Essentially the jobs that once americans can do are exported to Asia at a lower cost structure.  Americans need to upgrade theirs skills which requires time.  The transitional period is where we are now under the present economic condition.

Gloom and Boom

My economics professor once said that fiscal and monetary policies have their time and place.  Like telling a joke, the timing and delivery of the punch line is very important; therefore when implementing fiscal and monetary policies, timing is everything.

As rule of thumb, he said, "When we are in a glooming economic condition..i.e. financial crisis and the great depression, fiscal policy is very effective.  When in boom, monetary policy is more effective in influencing the economy."

Therefore, current economic conditions merit fiscal policy rather than monetary policy since there is not any policy traction from the Fed.  At the same time, fiscal stimulus policy is running against the wind of the fiscal hawks who fear the budget deficit will undermine ecocomic growth in the long run.

Ineffective monetary policy + no fiscal stimulus for fear of a high budget deficit = depression-like economic conditions.

CBO budget and economic outlook

It seems like the federal budget deficit for 2010 will be projected at $1.3 trillion, 9.1 percent of gross domestic product.  To put it into perspective, budget deficits are usually 3-4 percent of GDP, which is roughly 1/3 of $1.3 trillion; that equates to $300 billion under normal economic conditions.

Keeping current tax laws and appropriation spending constant, it is forecasted that the budget deficit will be reduced to 4-5 percent of GDP in the next 2 years.

I think the projections are too optimistic given the high unemployment rate.