There is no recession in Washington.
Except perhaps for the relatively few Washingtonians who are homeless, about to be homeless and/or about to lose their unemployment benefits — to their credit, Democrats in Congress are talking about (again) extending the period for which benefits can be claimed.
The Macys at the Pentagon Fashions — Pentagon Fashions! — shopping centre was buzzing. Here the sign of the times were massive discounts, but the public servants, politicians and lobbyists were buying like there’s no tomorrow.
“How is President Obama doing?” Henry asked the black taxi driver who took us to dinner (in a crowded restaurant on crowded M Street).
“It’s too soon to say,” was the unexpected response. “Ask me in two-three years, but he hasn’t had time to do anything yet.”
He warmed to his theme. “You cannot yet say Bush or Obama, our problems have been building for 40-50 years — poor regulation, mismanagement, overspending.”
Was this one of Henry’s American readers, or was he a moonlighting professor of economics from George Washington University? Henry is about to visit Chicago where ‘freshwater’ economists are rumoured to be saying this recession cannot be happening.
As an antidote to serious flying and tough business meetings, Henry delved into two big theoretical issues last week.
The first concerned the frailties of economic forecasters (including the Australian Treasury and the Obama economics team) and the closely related issue of whether fiscal stimulus is or is not working.
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The second was the general question of the “repair of monetary policy“, where bold rate moves were recommended as well as adding asset inflation to the Reserve Bank’s target for ‘inflation.’
There is also the important link between monetary and fiscal policy and the issue of a strongly rising Australian dollar.
Especially as recovery of private activity begins to gather pace, a combination of continued fiscal stimulus and tightening monetary policy will raise the value of the dollar, thereby limiting the highly desirable recovery itself.
In fact, with a flexible exchange rate, monetary policy has far more power to influence economic activity than it had with a fixed exchange rate, and fiscal policy has less influence – as expounded to Henry all those years ago by a visibly mellow Robert Mundell in the Three Tuns bar at the LSE.
In the Weekend Oz, Michael Stutchbury discusses the Aussie dollar’s ‘push to parity.’ “The world is radically repricing Australia on the back of China’s economic ascent and America’s financial woes. The rise and rise of the Australian dollar signals our new mining-based bounty and the difficult adjustments this will force on other industries during the next decade.”
Glenn Stevens has said he will normalise Australia’s interest rates, and Ben Bernanke says US rates will remain close to zero for some time.
Stutchbury concludes: “It would be an ironic contrast with Labor’s experience in the 80s if a muscular dollar became one of the Rudd government’s biggest financial headaches.”