really good news from the USA. Strong "WWII ended the Great Depression" vibes about it though. Turning on the fiscal taps to deal with a crisis also fixed the previous long-running stagnation.
https://twitter.com/jc_econ/status/1489606396387676177
And at the risk of sounding like a Friedmanite, I must say that turning on the monetary taps does not have the same effect. Fiscal policy was too tight for over a decade, and extremely loose monetary policy did not offset it.
What we actually needed in the decade after the financial crisis was looser fiscal policy and tighter monetary policy. To be fair, we did eventually get that a bit, under Trump. But mostly it was tight fiscal and loose monetary policy.
Until the pandemic, that is, when we had extremely loose fiscal and monetary policy. Fiscal was effective, though imho overdone (didn't need two heli drops). But the scale and timing of monetary stimulus was utterly lunatic.
Why on earth central banks thought stimulating demand in the middle of a pandemic was a good idea is beyond me. All they succeeded in doing was pumping up asset prices. And financing their own governments, of course.
I don't have a problem with central banks financing their own governments in a crisis like the pandemic. But trying to stimulate demand when half the economy is deliberately shut down shows an astonishing lack of logic and frankly disconnection with reality.
I opposed mon pol tightening in UK and EU in the years after the GFC because fiscal policy was being deliberately tightened to "fix the deficits". Combined monetary and fiscal tightening is only ever justified to regain control of inflation. There was no inflation at that time.
Had monetary policy been tightened as well, the result would have been a second recession - and in the Eurozone that is exactly what happened.
We can thank the Bank of England for the fact that the UK escaped a second recession, but the abrupt tightening of fiscal policy in the teeth of an energy price shock still knocked the stuffing out of a fragile economy.
So what do we have now? An energy price shock, a fragile economy, and abrupt tightening of fiscal policy. And what is the Bank of England doing? Raising interest rates. I do not follow the logic.
Tightening fiscal policy at the moment is a big mistake - are you listening, @RishiSunak? It will knock the stuffing out of the economy.
And so is raising interest rates into an energy price shock. BoE didn't make that mistake last time. But seems they think "this time is different".
Message to Andrew Bailey: There is no wage-price spiral. There is not even the shadow of a risk of a wage-price spiral. Stamping on wage rises will not prevent energy price rises. It will just knock the stuffing out of the economy.
As far as the US is concerned - imho there is a clear case for tighter monetary policy, and also tighter fiscal policy. Both were overdone during the pandemic, monetary policy seriously so, and the present inflation in the US partly arises from this. But ONLY in the US.
The US monetary policy of the last two years will be very hard to unwind without causing asset prices to crash.
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