The Shrinking Supply of Bazookas

Brad Delong brings up a great point; that we are due for another recession and the Fed has absolutely no ammunition left to fight it. Delong’s thesis was in response to a Twitter storm in Economist’s circles over Noah Smith’s Bloomberg article about the “often wrong” Austrian School economics view.

Real GDP bar

The days of expecting more than 3-4% GDP growth are over. The new normal is 2%, which translates into lower wages, continuous sticky high unemployment, and general lack of capital investments. What Delong doesn’t mention, and is a very real possibility with a new recession (even a little one) is deflation. There’s some who say that deflation wouldn’t be a bad thing – especially for all those people only making $7.25 per hour part time.

While I have no problem bursting the Wall Street bubble, for everyday folks, today’s debt will still be tomorrow’s debt, regardless how much that debt is actually worth. In this sense deflation would be bad. Also, deflation would certainly lead to a dollar devaluation. So that $7.25 per hour may end up being worth less in the long run, when put up against international trade, especially with China. So that Walmart thing made in China may end up costing more.

There was a lot of speculation a number of years ago, which I supported at the time, that there would be a double dip recession, and we would all suffer. What I didn’t count on was the breathtaking amount of money being sent to the bank (by the Fed) and just staying there, creating a Wall Street asset bubble that almost every economist agrees exists. Sticky prices were in direct relationship to sticky bank vaults.

One thing is clear. The next recession, and there (historically) will be one, will be ugly because the people on the street have not seen a full recovery. And there really are no more Bazookas to be had by the Treasury.

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