The story of the post-crisis economic period is simple:
- The housing boom left the household sector mired in a deep debt hole.
- This was further exacerbated by the leverage Wall Street added on top of the household sector's debt.
- This left the banks and household sector needing a great deal of support.
- Since 2008, we've seen huge amounts of stimulus from the Federal Reserve and global Central Banks, but we've had trouble transitioning from the Balance Sheet Recession period of 2008-2012 to a more sustainable growth trajectory.
Why has the recovery failed to accelerate? I suspect a few things are going on here:
- We have relied too heavily on Monetary Policy, which has turned out to be less stimulative than most people expected. While people like me were warning that QE would do a lot less than expected and could perhaps even be deflationary, there were widespread fears of potential high inflation and "debt monetization". These concerns were overstated, thanks in large part to irrational expectations about the efficacy of Monetary Policy and QE.
- Concerns over US government insolvency due to high debt levels and the negative impact of fiscal policy resulted in far less fiscal stimulus than we could have enacted.
We are now beginning to get some real clarity on what worked and what didn't. And one thing is abundantly clear - Monetary Policy has failed to ignite a strong and sustainable global economic recovery. QE was far less impactful than most people expected it to be, and this is being seen around the global economy. It's time to admit that Monetary Policy has failed, and that we need to do more on the fiscal side to get the economy back to full strength.
The current low inflation and low interest rate environment is screaming for policymakers to do more. If you're a Conservative, then demand lower taxes. If you're a Liberal, then demand infrastructure spending. Both get us to a larger budget deficit and the same basic outcome. Instead, we seem paralyzed by the same irrational fears that failed to get us out of this mess in the first place.