Tuesday , May 26 2020
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Living in a dream world

Summary:
Here’s the NYT: The sheer size and scope of the package would have been unthinkable only a couple of weeks ago. Administration officials said they hoped that its effect on a battered economy would be exponentially greater than its trillion cost, generating as much as trillion in economic activity. Really? Four trillion more in economic activity in a trillion economy? At a time when firms are closing down due to social distancing, and consumers will not be out spending money? How is this magic supposed to work?  Why not claim trillion?  Or 0 trillion? The legislation, which is expected to be enacted within days, is the biggest economic relief package in modern American history, dwarfing the 0 billion Wall Street bailout in 2008 and the 0 billion stimulus

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Here’s the NYT:

The sheer size and scope of the package would have been unthinkable only a couple of weeks ago. Administration officials said they hoped that its effect on a battered economy would be exponentially greater than its $2 trillion cost, generating as much as $4 trillion in economic activity.

Really? Four trillion more in economic activity in a $21 trillion economy? At a time when firms are closing down due to social distancing, and consumers will not be out spending money? How is this magic supposed to work?  Why not claim $40 trillion?  Or $400 trillion?

The legislation, which is expected to be enacted within days, is the biggest economic relief package in modern American history, dwarfing the $700 billion Wall Street bailout in 2008 and the $800 billion stimulus bill passed in 2009.

Dwarfing?  Really?  Nominal GDP in early 2020 is 50% larger than back in 2008.  How does a $2 trillion (loan plus spending) package in 2020 “dwarf” a $1.5 trillion dollar (loan plus spending) package in 2008-09.  Maybe I’m not too good at math.

I’ll have more posts when I’ve had time to digest this package.  No doubt there are a few good provisions (especially beefed up unemployment compensation and aid to hospitals), but sending $1200 checks to everyone is a crazy waste of money.  And exactly how is the aid to small businesses supposed to work?

On a more upbeat note, the mainstream media finally seems to be waking up to the fact that the Fed never runs out of ammunition. Devan Stormont sent me this David Ignatius piece from the WaPo:

When the Fed cut interest rates to zero on March 15, some analysts thought the Fed had exhausted its arsenal. But that turned out to be wrong. Ten days of creative policy followed, as the Fed demonstrated that in backstopping the markets by buying debt, it never runs out of bullets.

Finally!!!!!

And this is a more subtle point, but equally important:

One measure of success for Powell will be if people decide in retrospect that his crisis moves were unnecessary. They’ll have the luxury of not understanding how much worse things could have been if the central bank hadn’t taken strong action.

Unfortunately, I don’t expect us to have that “luxury”.

I previously congratulated the Fed for indicating a willingness to buy unconventional assets such as corporate bonds.  The actual policy news is both better and worse than I assumed.  Worse in the sense that this is being done under a program where any Fed losses must be backstopped by the Exchange Stabilization Fund, which limit show much they can buy.  Better in the sense that Congress seems about to dramatically increase this fund, so that the Fed will be free to buy a much larger quantity of risky assets if necessary.  (I’d still prefer they not do so until conventional ammo is exhausted.)

For years I’ve argued that Congress should allow the Fed to buy a much wider range of assets in an emergency, and that Congress should also tell the Fed not to let fear of losses on its portfolio of bonds hold it back from doing whatever it takes to achieve its Congressional mandate.

Update:  Early last week I asked why anyone who was investing for the long run (and didn’t need to sell) would prefer a 10-year Treasury to a 10-year TIPS.  At the time, the TIPS spread was 0.63%.  Today it’s 1.04%.

You’re welcome.

And I still wonder, as even 1.04% seems really low.

HT:  TravisV.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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