2. 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
benefits.

3. Mortgage Rates
The Fed is now buying residential mortgage-related securities as a way to push down
mortgage rates and spur housing. But the effect of these measures has been largely
neutralised by a number of negative forces, including tight lending standards, low credit
scores, "underwater" mortgages, uncertain job security or unemployment and the
awareness of consumers that for the first time since the 1930s on a nationwide basis,
house prices have dropped substantially and could do so again.
Nevertheless, the Fed is relying on five interlocking steps to increase job creation: First,
the central bank buys Treasuries or mortgage-related securities. Second, the sellers
reinvest the proceeds in assets such as stocks, commodities and real estate, pushing up
prices. Third, higher asset prices have a real wealth effect by making investors feel richer.
This, in turn, leads people to spend on consumer goods and services, as well as capital
equipment. And last, that spending spurs production and demand for labour.
So far, it hasn't worked as planned. Despite recent improvements, the US unemployment
rate, at 7.7 per cent, remains very high by historical standards, particularly more than 3
1/2 years after the trough of a recession. And cautious employers have turned to
temporary workers who generally are paid less and are easier to dismiss than full-time
ones.
Temporary, Limited Effects: Every round of easing by the Fed has been accompanied by
a jump in stocks that lasted only until the next crisis in Europe or the US In addition, the
gross-domestic-product bang per buck of new debt isn't what it used to be.