Epsilon Capital Management Economy Reviews The huge fiscal and monetary stimulus dispensed in recent years has staved off the onset of chronic deflation. For now.
The deficits created by this spending would be inflationary only if the measures occurred in a period of full employment and created excess demand. That isn't the case in the US, where the large budget shortfalls are a response to private-sector weakness that has depleted tax revenue.
Indeed, even with persistent trillion-dollar deficits and huge monetary-easing programs, the slack we see in the economy reflects the huge size and scope of the offsetting deleveraging in the private sector that I noted in yesterday's column.
Monetary Stimulus: The Federal Reserve and other central banks have been extremely aggressive. First, the Fed pushed the short-term rates they control to almost zero - with little effect. Then it turned to quantitative easing, the enormous purchases of government bonds and other securities that have been tried by the Bank of Japan for years without notable success. The Fed, with its dual mandate to promote full employment as well as price stability, is using a very blunt instrument to try to create jobs.
The central bank can raise or lower short-term interest rates, and buy or sell securities. Those actions have little to do with creating more jobs. In contrast, fiscal policy can be surgically precise, aiding the jobless by extending and expanding unemployment b...