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Wednesday, December 10, 2008

I got good news and bad news...what do you want first?

These graphs are from Jim Hamilton's blog. The one on the left shows that unemployment is not falling as rapidly in this recession as it did in 1981-82 or 1973-75. That is the good news. The bad news is the graph on the right. It shows the Fed has dropped interest rates farther and faster than before. Since the recession does not look like it is letting up, the Fed is out of gas for this avenue to promote recovery.


Anonymous said...

Is graph2 illustrative of a liquidity trap scenario?

Randall Parker said...

Dear Anon: The answer is no. The liquidity trap does not exist and is an economic myth. Why? Because people who present it as a real economic concept do not understand the difference between real and nominal interest rates. Even with the fed funds rate at zero, the Fed can push the real interest rate negative....and may do just that. As James Hamilton has said, that is Plan C. Plan A was drop the fed funds rate, which it is now effectively zero. Plan B was LEND LEND LEND and the Fed has done that in historically unprecedented ways. But still we have the same mess. Plan C is to inflate. Stay tuned, that is next.

EconIdiot said...

Doc - Hope you could reply to this comment despite it not regarding recent post. Could the Fed have balloned its balance sheet and created such a large increase in the monetary base as it has done over the past several months if the U.S. were still on the G.S.?

Randall Parker said...

The answer to this question is it depends ... but almost certainly NO. If the Fed had the "free gold" with which to expand the monetary base then it could be done. But it challenges the imagination to think they would have or could have the reserves for what we are seeing now. Moreover, the independent interest rate policy of lowering the interest rate down to zero would have ushered in an international capital/gold flight that would have crashed the whole shooting match.