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Quarterly Review and Outlook: Growth Recession Continues Fiscal Policy in Neutral
Quarterly Review and Outlook: Growth Recession Continues Fiscal Policy in Neutral
exports. Chart 1
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Quarterly Review and Outlook Fourth Quarter 2010
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Quarterly Review and Outlook Fourth Quarter 2010
GDP in the fall of 2000; (4) 9/11; (5) the mild Well-intentioned actions to promote growth
deflation of 2002-3; (6) the market crisis and and fine tune the economy by micromanagement
massive recession and housing implosion of have instead produced failure. Although the Fed
2007-9, and now, (7) the lack of a private sector, had little choice in massively supporting financial
self-sustaining recovery. markets in 2007/8, no Fed intervention would
have been a more long-term productive stance in
The Fed diagnosed each of these events as the previous economic events. QE2 is another
being caused by insufficient liquidity. Actually, example of flawed Fed policy operations.
the lack of liquidity was symptomatic of much
deeper problems caused by their own previous The Saving Rate Decline
actions. The liquidity injected during these events
led to a series of asset bubbles as the economy In the second half of 2010, real GDP grew
utilized the Fed’s largesse to increase aggregate at an estimated 3.3% annual rate (assuming the
indebtedness to record levels. The liquidity fourth quarter growth rate was 4%), up from
problems arose as the asset bubbles burst when 2.7% in the first half of the year. Transitory
debt extensions could not be repaid and generally developments in two of the most erratic and
became unmanageable. Each succeeding unpredictable components of the economy---the
calamity or bust reflected reverberations from personal saving rate and inventory investment--
prior Fed actions. -accounted for all of this acceleration.
While governmental directives to Fannie From 6.3% in June 2010, the personal
and Freddie to increase home ownership clearly saving fell by a significant 1%, to 5.3% in
also played a role, the Fed supported this process November (Table 1). Consumer spending is
by providing excessive liquidity to fund the slightly in excess of 70% of real GDP. Without
housing bubble as well as other unprecedented the one percentage point reduction in the personal
forms of leveraging of the U.S. economy. The saving rate, the second half growth rate would
heavy leveraging and the associated asset have been 2.6%, a shade slower than the first
bubbles, however, produced only transitory and half growth pace, and materially less than the
below trend economic growth. Similarly, like its presumed second half growth rate.
predecessors, QE2 is designed to cure an over-
indebtedness problem by creating more debt. When job insecurity is high, and defaults,
delinquencies and bankruptcies are at or near
In addition to failing to revive the economy record levels, a drawdown in the saving rate
permanently, major unintended consequences
Personal Saving Rate
have arisen. The LTCM bankruptcy created a %
$3 billion loss, a very modest amount in view of 1. 2.
began in the midst of a stock market sell off. 13. November 2010 5.3
Table 1
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Quarterly Review and Outlook Fourth Quarter 2010
4% 4%
Adverse Global Considerations
2% 2%
0% 0%
The global economy since 2009 may be
-2%
Avg. Since
1990 = 1.1% -2%
referred to as a two speed recovery, with China,
-4% -4%
India, Brazil, and other emerging economies at
-6% -6%
the high speed and the U.S. and Europe at the
48 55 62 69 76 83 90 97 '04 '11 slow speed. That pattern is likely to continue,
Source: Bureau of Economic Analysis. Through Q3 2010.
and Brazil are likely to slow adversely affecting Current Account Balance as a % of GDP
2 year moving average
the U.S. and Europe. Thus, the two speed
recovery will continue, but with the entire world 3% 3%
2% 2%
growing at a much more modest pace. Two 1% 1%
major considerations point to this outcome. 0% 0%
First, the higher food and fuel prices discussed -1% -1%
earlier will serve to significantly depress growth -2% -2%
Van R. Hoisington
Lacy H. Hunt, Ph.D.
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