Related News
Home » Opinion » Foreign Views
Very long, slow slog ahead for US economy
By Richard W. Fisher |
June 11, 2009, Thursday
|
Print Edition
Print Edition
BEGINNING in August of 2007, we confronted a total breakdown of the financial system.
Having announced our extension of term lending to banks in December, in rapid order, we then set in motion a series of steps to provide liquidity, strengthen the security of certain banks, become the equivalent of market maker for key financial instruments such as commercial paper and certain asset-backed securities and, in ways appropriate to the times, deliver on our mandate as lender of last resort.
You are all familiar with the efforts taken by the Federal Reserve to these ends. I think it fair to say that with these actions the Federal Reserve has done everything in its power to avoid making the modern equivalent of the "misjudgments" that Liaquat Ahamed argues were made by our predecessors in the 1930s (and, I should add parenthetically, that everyone and their brother feel Japan made in the 1990s).
There is evidence that our actions have succeeded in pulling the financial markets and the economy from the edge of the abyss. There are, as many have noted, some "green shoots" beginning to sprout that will help end the contraction in output and set the stage for a recovery.
This is not to be Pollyannaish or imply that these sprouts are spreading like kudzu. To be sure, we are not out of the woods. We have miles to go before we sleep. Compared with the fourth quarter of last year, first quarter results for the nation's largest banks are encouraging, yet obvious challenges remain.
Confidence among business women and men - the creators of lasting, productive jobs and prosperity - has shown signs of revival but remains elusive.
Consumers at home remain cautious, for fear of losing their homes or their jobs. The markets we sell into abroad - Mexico and Europe, for example - remain strikingly weak, while others such as China are perhaps more robust but are insufficiently sized to fill the hole left by consumers at home and in our larger export markets.
Under these conditions, I have been forecasting a slow recovery. Not a V-shaped snapback - nor even a U-shaped one - but a very slow slog as we find a more sensible and sustainable mix between consumption, savings and investment.
I would be delighted, but surprised, if meaningful sustained growth gets under way before the end of the year.
Storm clouds on the horizon take the form of daunting fiscal imbalances. That the deficits will be high over the next few years seems clear, with a US$1.8 trillion deficit expected this year and US$3.8 trillion in new debt issuance now forecast over the next five years.
Perhaps more important, annual deficits exceeding half a trillion dollars are projected for at least 10 years into the future, emphasizing that we as a nation will continue to spend considerably more than we take in long after the current economic crisis.
The country's major newspapers recently reported with great urgency the administration's finding that Social Security would begin spending more than it takes in by 2016 - seven short years from now. Left unreported was the fact that the discounted present value of entitlement debt, over the infinite horizon, reached US$104 trillion.
This is almost eight times the annual gross domestic product of the United States - and almost 20 times the size of the debt our government is expected to accumulate between 2009 and 2014.
Most of this entitlement shortfall comes from Medicare rather than Social Security. As you may know, Medicare has three main components: Part A for hospital stays, Part B for doctor visits and Part D for prescription drugs.
The fiscal shortfall for Part A alone is US$36.4 trillion - about one third of all entitlement debt. Part B's shortfall is just a tad larger, clocking in at US$37 trillion. Part D - the latest addition to the Medicare program - registers a shortfall of US$15.5 trillion.
And Social Security, the program about which various reforms have been so frequently mooted in recent years, registers a deficit of US$15.1 trillion - only one seventh of the total unfunded liability from entitlement programs.
This is the fiscal predicament to which I alluded earlier - a looming budgetary threat to our long-term economic prosperity. Our successor generations might logically begin to alter their consumption patterns, spending less today to save more for tomorrow. There is nothing wrong with increasing savings.
But, in an economy driven by consumption, this intertemporal hedging may dampen the pace of future economic growth. Of course, any student of history knows that throughout time, governments unwilling to face the music and fund their liabilities have turned to monetary authorities to print their way out of their predicament.
We all know by heart the pathologies that afflicted Weimar Germany, Argentina and other countries.
(The author is president and CEO of Federal Reserve Bank of Dallas, Texas, US. The article is adapted from his remarks before the Washington Association of Money Managers on May 28 in Washington, D.C. The views expressed are his own.)
Having announced our extension of term lending to banks in December, in rapid order, we then set in motion a series of steps to provide liquidity, strengthen the security of certain banks, become the equivalent of market maker for key financial instruments such as commercial paper and certain asset-backed securities and, in ways appropriate to the times, deliver on our mandate as lender of last resort.
You are all familiar with the efforts taken by the Federal Reserve to these ends. I think it fair to say that with these actions the Federal Reserve has done everything in its power to avoid making the modern equivalent of the "misjudgments" that Liaquat Ahamed argues were made by our predecessors in the 1930s (and, I should add parenthetically, that everyone and their brother feel Japan made in the 1990s).
There is evidence that our actions have succeeded in pulling the financial markets and the economy from the edge of the abyss. There are, as many have noted, some "green shoots" beginning to sprout that will help end the contraction in output and set the stage for a recovery.
This is not to be Pollyannaish or imply that these sprouts are spreading like kudzu. To be sure, we are not out of the woods. We have miles to go before we sleep. Compared with the fourth quarter of last year, first quarter results for the nation's largest banks are encouraging, yet obvious challenges remain.
Confidence among business women and men - the creators of lasting, productive jobs and prosperity - has shown signs of revival but remains elusive.
Consumers at home remain cautious, for fear of losing their homes or their jobs. The markets we sell into abroad - Mexico and Europe, for example - remain strikingly weak, while others such as China are perhaps more robust but are insufficiently sized to fill the hole left by consumers at home and in our larger export markets.
Under these conditions, I have been forecasting a slow recovery. Not a V-shaped snapback - nor even a U-shaped one - but a very slow slog as we find a more sensible and sustainable mix between consumption, savings and investment.
I would be delighted, but surprised, if meaningful sustained growth gets under way before the end of the year.
Storm clouds on the horizon take the form of daunting fiscal imbalances. That the deficits will be high over the next few years seems clear, with a US$1.8 trillion deficit expected this year and US$3.8 trillion in new debt issuance now forecast over the next five years.
Perhaps more important, annual deficits exceeding half a trillion dollars are projected for at least 10 years into the future, emphasizing that we as a nation will continue to spend considerably more than we take in long after the current economic crisis.
The country's major newspapers recently reported with great urgency the administration's finding that Social Security would begin spending more than it takes in by 2016 - seven short years from now. Left unreported was the fact that the discounted present value of entitlement debt, over the infinite horizon, reached US$104 trillion.
This is almost eight times the annual gross domestic product of the United States - and almost 20 times the size of the debt our government is expected to accumulate between 2009 and 2014.
Most of this entitlement shortfall comes from Medicare rather than Social Security. As you may know, Medicare has three main components: Part A for hospital stays, Part B for doctor visits and Part D for prescription drugs.
The fiscal shortfall for Part A alone is US$36.4 trillion - about one third of all entitlement debt. Part B's shortfall is just a tad larger, clocking in at US$37 trillion. Part D - the latest addition to the Medicare program - registers a shortfall of US$15.5 trillion.
And Social Security, the program about which various reforms have been so frequently mooted in recent years, registers a deficit of US$15.1 trillion - only one seventh of the total unfunded liability from entitlement programs.
This is the fiscal predicament to which I alluded earlier - a looming budgetary threat to our long-term economic prosperity. Our successor generations might logically begin to alter their consumption patterns, spending less today to save more for tomorrow. There is nothing wrong with increasing savings.
But, in an economy driven by consumption, this intertemporal hedging may dampen the pace of future economic growth. Of course, any student of history knows that throughout time, governments unwilling to face the music and fund their liabilities have turned to monetary authorities to print their way out of their predicament.
We all know by heart the pathologies that afflicted Weimar Germany, Argentina and other countries.
(The author is president and CEO of Federal Reserve Bank of Dallas, Texas, US. The article is adapted from his remarks before the Washington Association of Money Managers on May 28 in Washington, D.C. The views expressed are his own.)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
