Posted by WARREN MOSLER on September 30th, 2010
The charts are Fed numbers that show how high debt is compared to incomes. What it shows is that as the govt. deficits increased they added income and savings to the economy which resulted in higher incomes and lower total private debt. In the past the next credit expansion began after the financial obligations ratios came down in this manner.
These are June numbers, and federal deficit spending is what brings them down, so they should be that much lower today.
So while it’s impossible to say exactly how far the ratio of debt to income needs to fall before the next credit expansion will begin, I expect modest growth to continue as it has with very modest job growth and unemployment remaining too high until consumer credit expansion does begin to kick in, which could be anytime now, that the debt ratios are no longer an obstacle.
The right move in August 2008 was a full payroll tax (FICA) holiday which would have sustained demand and prevented the recession and kept unemployment at desired levels.
It was nothing more than policy response that allowed a financial crisis to spill over to the real economy.
The interest rate cuts unfortunately (but predictably) served mainly to reduce spendable interest income as income was transfered from savers to bank net interest margins, and as govt. interest payments to the economy were reduced by the lower rates.
Lowering rates was not ‘wrong,’ as there are positive supply side and distributional effects from lower rates, but what was missed was that lower rates needed to be accompanied by even lower taxes to offset the induced drag of the lower rates.
To date we remain grossly over taxed for the size govt we have and for the current credit conditions, as evidenced by the too large output gap and far too high unemployment rate.
So with China not collapsing as many feared, and the euro zone muddling through with ECB support, my outlook remains positive for the US economy, though from unfortunately high levels of unemployment and true misery due solely to policy blunders.
The Republicans got us into this and the Democrats failed to get us out, and all for the same reason- non of them understand how their own monetary system works.
So thanks in advance for kindly directing everyone you know ‘The 7 Deadly Innocent Frauds of Economic Policy’ here.