1. The Future of Our Economic
Environment
Ryan Herzog, Ph.D.
Assistant Professor of Economics
Gonzaga University
10/24/2009
Prepared for Fall Family Weekend

3. GM Moral Hazard
Main Street
Washington Mutual
CDOs
$787 ARM ARRA
Speculation
Housing Bubble
billionContained
Chrysler
Default
777 $1.4 Flip
Negative Am
Depression Frozen
Freddie
Fannie
TALF MBS Country Wide trillion Nationalize
Subprime Foreclosure AIG
Lehman
Wall Street $12 trillion
$700 billion
TARP
Bear Stearns
Credit Default Swaps Bailout
Bankruptcy
Systemic Risk Quantitative
$168 Billion Easing

4. Going Forward
• We can’t change the past
• Fiscal Policy
– Are we digging too large of a hole?
• Monetary Policy
– Was it bad policy, bad regulations, or something
else?
• International Issues
– What about our large external deficits?

5. Change in GDP (2007-2009)
2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV 2009-I 2009-II
Percent change in gross domestic product 3.6 2.1 -0.7 1.5 -2.7 -5.4 -6.4 -0.7
Personal consumption expenditures 1.35 0.86 -0.39 0.06 -2.49 -2.15 0.44 -0.62
Gross private domestic investment 0.14 -1.29 -1.2 -1.66 -1.04 -3.91 -8.98 -3.1
Net exports of goods and services 1.36 2.24 0.36 2.35 -0.1 0.45 2.64 1.65
Government spending 0.75 0.31 0.51 0.71 0.95 0.24 -0.52 1.33

6. Key Variable - Projections
CBO's Projection of Key Economic Variables
12.0%
10.0%
8.0%
6.0%
Real GDP (Percentage Change)
4.0% CPI (Percentage Change)
Unemployment Rate
2.0%
0.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-2.0%
-4.0%

7. Exploding Government Spending
Government Expenditure and Receipts
4000.0
3500.0
3000.0
2500.0
Billions of Dollars
2000.0
Federal Government Expenditures
Federal Government Receipts
1500.0
1000.0
500.0
0.0
Aug-97
Oct-99
Jun-08
Jun-95
Sep-98
Feb-04
Feb-91
Dec-01
Mar-05
Mar-92
Jul-96
Jan-03
May-07
Jan-90
May-94
Apr-06
Apr-93
Nov-00

8. Fiscal Debt - Projections
20,000,000 140
18,000,000
120
16,000,000
14,000,000 100
Millions of Dollars
12,000,000
80
Gross Federal Debt (Millions of
10,000,000 Dollars)
60 Gross Federal Debt (% GDP - right
8,000,000 scale)
6,000,000 40
4,000,000
20
2,000,000
0 0
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016

9. Government Spending
6000
5000
4000
Current Expenditure
Billions
3000
Transfer Payment
Interest Payments
2000
1000
0

10. Government – Interest Payments
Projected Interest Payments
1,200,000
1,000,000
800,000
Payments (4%)
Millions
600,000 Payments (5%)
Payments (6%)
Actual (through 2008)
400,000
200,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

11. Overview of Fiscal Policy
• Should we be concerned about added
spending?
• Where will the money come from and at what
cost?
• Is an 88% (of GDP) debt loan high?
– Japan currently has a debt loan of 170%
• A new tax system that centers around a value
added tax, a broad tax base with low tax rates,
taxing consumption, and taxing bads.

12. TOP 10 REASONS TO STUDY
ECONOMICS
1. Economists are armed and dangerous: "Watch out for our invisible hands.“
2. Economists can supply it on demand.
3. You can talk about money without every having to make any.
4. You get to say "trickle down" with a straight face.
5. Mick Jagger and Arnold Schwarzenegger both studied economics and look
how they turned out.
6. When you are in the unemployment line, at least you will know why you are
there.
7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".
8. Although ethics teaches that virtue is its own reward, in economics we get
taught that reward is its own virtue.
9. When you get drunk, you can tell everyone that you are just researching the
law of diminishing marginal utility.
10. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have
something to talk about.

13. Monetary Policy
• What is it?
• Is the Federal Reserve to blame for the
housing bubble?
• Should the Federal Reserve respond to
changes in asset prices?
• Are we setting ourselves up for a period of
high inflation (is stagflation possible)

14. Policy Rules and Inflation Targeting

15. Was Policy too Loose?

16. Did Low Interest Rates Create the
Bubble?

17. Short-term and Long-term Rates

18. Loanable Funds

19. Monetary Policy Today
Federal Reserve – Select Liabilities
2000.000
1800.000
1600.000
1400.000
1200.000
Monetary Base
Billions
1000.000
M1
800.000 Excess Reserves
Currency
600.000
400.000
200.000
0.000
Oct-92
Aug-94
Jun-96
Oct-03
Aug-05
Sep-93
Jun-07
Dec-90
Feb-00
Sep-04
Mar-99
Dec-01
Jan-90
Jul-95
May-97
Jan-01
Jul-06
Nov-91
Apr-98
May-08
Nov-02
Apr-09

20. Monetary Policy Today
Federal Reserve - Select Assets
1800.000
1600.000
1400.000
1200.000
1000.000
Billions
Total Borrowings
800.000
Securities Held Outright
600.000
400.000
200.000
0.000

21. Monetary Policy - Overview
• The Fed was unable to control long-term interest
rates
– Large inflows of foreign capital kept interest rates
extremely low
• We have to be careful when we try to pop
bubbles
– The early euphoria phase is well liked
– Price setting does not work
• Will the Fed be able to unwind their balance
sheet?

22. International Issues
• Prior to the crisis we were concerned over the
growing external deficits.
– What is happening today?
• Should we be worried about a declining
dollar?

23. Billions of U.S. Dollars
50.000
-250.000
-200.000
-150.000
-100.000
0.000
-50.000
Jan-90
Dec-90
Nov-91
Oct-92
Sep-93
Aug-94
Jul-95
Jun-96
May-97
Apr-98
Mar-99
Feb-00
Jan-01
Dec-01
Nov-02
Oct-03
Sep-04
Aug-05
Jul-06
Jun-07
May-08
Apr-09
Current Account Imbalance
Current Account

24. Overview
• Prior to the crisis
– The current account balance had many
economists predicting a hard landing, a complete
loss of external financing.
• Post crisis
– The depreciation of the dollar (thanks Fed) has
caused exports to decrease less than imports.

25. Concerns Going Forward
• Financing the Government Deficit
– In 2001, $1 trillion was financed by foreigners
• $378 billion by Japan, $78 billion by China
– In 2008, $3 trillion was financed by foreigners
• $727 billion by China, $626 by Japan
• Can the Fed wind down their balance sheet?
– In 2007, they had $850 billion in liabilities
– Today they have $2.1 trillion in liabilities
• How long will the flight to quality last?
– Low interest rates and cheap financing!

26. Thank You
• Go DUCKS!

27. Misc. Graphs