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Beta alpha 2010

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Beta alpha 2010

  1. 1. Current Economic Update Ryan Herzog, Ph.D. Assistant Professor of Economics Gonzaga University 04/10/2010 Prepared for Beta Alpha Psi
  2. 2. Current Economic Update
  3. 3. Current Economic Update <ul><li>Fiscal Policy </li></ul><ul><ul><li>Are we digging too large of a hole? </li></ul></ul><ul><ul><li>Is the ARRA working? </li></ul></ul><ul><ul><li>Where are the jobs? </li></ul></ul><ul><li>Monetary Policy </li></ul><ul><ul><li>Where do we stand with TARP? </li></ul></ul><ul><ul><li>Was it bad policy, bad regulations, or something else? </li></ul></ul><ul><ul><li>Is high inflation around the corner? </li></ul></ul><ul><li>International Issues </li></ul><ul><ul><li>What about our large external deficits? </li></ul></ul>
  4. 4. Key Variable - Projections
  5. 5. Fiscal Debt - Projections
  6. 6. Government – Interest Payments
  7. 7. ARRA Effectiveness
  8. 8. Overview of Fiscal Policy <ul><li>Should we be concerned about added spending? </li></ul><ul><ul><li>We need to return deficits to manageable levels. </li></ul></ul><ul><ul><li>The current path of government spending will crowd out private investment through sharp increases in interest rates. </li></ul></ul><ul><li>Where will the money come from and at what cost? </li></ul><ul><ul><li>How dependent will we be on external funding? </li></ul></ul>
  9. 9. Job Creation <ul><li>Have recent stimulus packages been sufficient at creating jobs? </li></ul><ul><ul><li>Extensions of unemployment insurance have helped but have not been enough. </li></ul></ul><ul><ul><li>Are will missing the root of the problem? </li></ul></ul>
  10. 10. Unemployment
  11. 11. Construction and Manufacturing
  12. 12. Structural Concerns
  13. 13. Jobs <ul><li>The recession has simply magnified and sped up job losses in the manufacturing sectors. </li></ul><ul><ul><li>The construction industry provided alternative employment. </li></ul></ul><ul><li>We need to focus on retraining 5 million workers. </li></ul><ul><li>Extending unemployment compensation does not address the structural problems in the manufacturing industry. </li></ul><ul><ul><li>Workers are searching for jobs that do not exist or will not exist in the near future. </li></ul></ul>
  14. 14. Monetary Policy <ul><li>What caused the separation between short-term and long-term interest rates? </li></ul><ul><li>Are we setting ourselves up for a period of high inflation (is stagflation possible)? </li></ul><ul><li>Where do we stand with TARP? </li></ul><ul><li>Should we try and pop bubbles? </li></ul>
  15. 15. Short-term and Long-term Rates
  16. 16. Nonresidential Investment
  17. 17. Capital Inflows
  18. 18. Money Supply
  19. 19. Quantitative Easing
  20. 20. TARP <ul><li>Where do we stand? </li></ul><ul><li>Did it really cost $700 billion like some claim? </li></ul>
  21. 22. Monetary Policy - Overview <ul><li>Large inflows of foreign capital made it difficult for the Fed to control long-term interest rates </li></ul><ul><li>We don’t have good mechanisms in place for determine asset bubbles </li></ul><ul><ul><li>The early euphoria phase is well liked </li></ul></ul><ul><li>Will the Fed be able to unwind their balance sheet before inflation risks mount? </li></ul><ul><ul><li>The Fed is paying interest on reserve holdings which will allow them the time to take reserves out of the system </li></ul></ul>
  22. 23. International Issues <ul><li>Prior to the crisis we were concerned over the growing external deficits. </li></ul><ul><ul><li>What is happening today? </li></ul></ul><ul><li>Should we be worried about a declining dollar? </li></ul><ul><ul><li>Will it help the manufacturing sector? </li></ul></ul><ul><li>What about China? </li></ul>
  23. 24. Balance of Payments
  24. 25. Foreign Investment <ul><li>Foreign inflows have been into U.S. treasury securities </li></ul><ul><ul><li>China: $889 billion </li></ul></ul><ul><ul><li>Japan: $764 billion </li></ul></ul><ul><ul><li>Oil Exporters: $218 billion </li></ul></ul><ul><ul><li>United Kingdom: $206 billion </li></ul></ul>
  25. 26. Overview <ul><li>Prior to the crisis </li></ul><ul><ul><li>The current account balance had many economists predicting a hard landing, a complete loss of external financing. </li></ul></ul><ul><li>Post crisis </li></ul><ul><ul><li>The depreciation of the dollar has caused exports to decrease less than imports. </li></ul></ul>
  26. 27. Concerns Going Forward <ul><li>Financing the Government Deficit </li></ul><ul><ul><li>In 2001, $1 trillion was financed by foreigners </li></ul></ul><ul><ul><ul><li>$378 billion by Japan, $78 billion by China </li></ul></ul></ul><ul><ul><li>In 2009, $3.6 trillion was financed by foreigners </li></ul></ul><ul><ul><ul><li>$889 billion by China, $764 billion by Japan </li></ul></ul></ul><ul><li>Can the Fed wind down their balance sheet? </li></ul><ul><ul><li>In 2007, they had $850 billion in liabilities </li></ul></ul><ul><ul><li>Today they have $2.3 trillion in liabilities </li></ul></ul><ul><li>How long will the flight to quality last? </li></ul><ul><ul><li>Low interest rates and cheap financing! </li></ul></ul>
  27. 28. Disclaimer