US Monetary & Fiscal Policy

Monetary Policy
With three months to run until the Fed winds up the QE 2 $600 bil. Treasuries buy program, the
broad measure of credit driven liquidity will need to accelerate markedly higher in level to
warrant abandoning QE, except perhaps on a short term "test" basis. The banking system has
so far just been too slow to come around and business and consumers have remained very cautious
in using credit. Perhaps it will turn out that the normal flow of credit finance is set to resume, but
there is precious little evidence to date that such is the case.

There are volumes of articles on the web suggesting the Fed has been reckless in providing what
will turn out to be a little over $2 tril. of credit to the financial system during the crisis and the
recovery looking out to 6/30/11. Yet, since the end of 2008, the broadest measure of financial
liquidity has declined from $15.1 tril. to $14.1 tril. Only the Good Lord knows how badly things
may have wound up without that very large infusion of money. Moreover, should private sector
credit demand finally accelerate at full throttle, the Fed has it well within its means to shrink its
balance sheet substantially.

Fiscal Policy
The public is primarily interested in a restoration of the job market and a stabilization and eventual
recovery of the residential real estate market. Federal budget deficit slashing in this very difficult
economy is a lower priority. But now both the President and the Congress have deficit trimming
fever. There is $38 bil. in spending cuts on the table now, and likely more forthcoming given the
climate in official Washington. Planned spending cuts as they accumulate will create genuine
fiscal drag in the years ahead and will reduce the real growth rate of the economy as they pile
up. Budget battles will also highlight the cultural and class warfare that is gathering considerable
steam. It will be interesting political theatre and would be quite diverting if the economic recovery
was firmly established. Meanwhile, the public will likely stay focused on jobs and housing and
will base their confidence accordingly.