“The Longhorn”

That´s the image that´s brought to mind from looking at private employment over the last several years.


The economy is back to generating employment at the same rate that it was doing before the crisis hit, despite the sequester. The problem is that it is not offsetting the large loses that took place during 2008-09.

Undoing the fiscal contraction is unlikely to change the outcome. It is very much dependent on monetary policy and until monetary policy is geared to ‘offsetting’ the drop in spending that occurred in 2008-09, the level of employment will be below what otherwise would be the case.

The picture below illustrates what could have been if monetary policy had been more ‘friendly’, even assuming some permanent nominal spending loss and lower trend growth rate. Certainly a ‘world of difference’ to the economy and workers.


And how effective has ‘forward guidance’ cum QE been? Compared to 2003 it has been quite ineffective and increasingly so at each new QE as the picture below shows. Instead of increasing, money velocity has been falling (money demand increasing) and money supply has not been adequately offsetting this. That´s why while after mid-2003 spending climbed back to trend, now it is ‘languishing’ below any reasonable trend level.


3 thoughts on ““The Longhorn”

  1. Pingback: “The Longhorn” | Fifth Estate

    • JzB There´s the “Great Inflation” rising velocity trend from the mid 60s and the low/falling inflation falling velocity trend. But cycles ARE about the ‘wiggles’. The 2002-04 chart above for velocity makes that point very clearly. A “friendly” (or stabilizing) monetary policy is one that keeps M*V on a stable path, i.e. M changes to offset changes in V, keeping PY (NGDP) on a stable path.

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