Assessing the economic impact of current monetary and fiscal policies

What will be the immediate and longer-term outcome of the monetary and fiscal support provided by the Federal Reserve and the Federal government to the US economy during the coronavirus pandemic?

More generally, what will be the impact of similar monetary and fiscal policies implemented in other leading economies?

Currently the official view from governments, central banks and official international institutions such as the IMF appears to be that the world will be so depressed, activity so much lower, and unemployment so much higher than pre-Covid that governments and central banks will need to roll out unprecedented measures for years ahead.

The judgment of the authorities, in short, is that the current downturn is far worse than that caused by the global financial crisis (GFC) of 2008-09.

“Scarring”

Moreover, since that crisis took many years to overcome and since there will be widespread “scarring” of the labour force on this occasion, even more stimulus will be required to deal with the pandemic-induced recession and it will be required for much longer.

However, a very different assessment of the post-GFC situation is possible.

A concise way to summarise that difference for the US is by looking at money supply growth.

Over the past decade, despite three episodes of quantitative easing which hugely increased “money on the books of the central bank”, broad money or “money in the hands of the public” grew only at a very modest rate between 2009 and 2018.

The evidence suggests that the slow recovery and sub-target inflation rates in the US, the Eurozone and Japan between 2009 and 2019 were all the result of specific policy measures whose consequences were either little understood or ignored - even by those who were implementing them.

Further, it is only by understanding properly what happened in the wake of the GFC that appropriate policies can be designed for the post-pandemic environment.

For further insight and analysis, including a more detailed look at the four sections shown below, please read the full report.

Section 1 will show why the seemingly massive stimulus policies implemented after the GFC were not, in fact, as expansionary as they seemed at first sight, applying this analysis primarily to the US.

Section 2 explains the two main reasons why the policies implemented by the authorities over the past decade did not generate the inflationary results that so many people had feared in 2008 or 2009.

Section 3 extends the analysis to the UK, the Eurozone and Japan. 

Section 4 concludes by spelling out the implications that current policies, if continued, could have for asset markets, economies and inflation.