Anatomy of a Market Meltdown
Roger W. Garrison
Auburn University
Federal Government Surplus (+) and Deficit (-)
in billions of dollars (1994 to present)
Federal Reserve Economic Data
The federal budget deficit is expected to
reach $500 billion or more by next year.
Federal Government Surplus (+) and Deficit (-)
in billions of dollars (1925 to present)
$293 billion
Compare deficit-to-GDP:
Compare deficit-to-saving:
$500 billion
1992:
293 / 6,184 = 4.7%
Federal Reserve Economic Data
1992: 293 / 1,018 = 28.8%
2004: 500 / 11,200 = 4.5%
Will500
the/ 1,400
Bush=43
deficit of 2004 be worse
2004:
35.7%
than the Bush 41 deficit of 1992?
Federal Government Surplus (+) and Deficit (-)
in billions of dollars (1925 to present)
?
$293 billion
$500 billion
Federal Reserve Economic Data
Why can’t we do in 2003 what we did in 1992?
Federal Funds Rate (1959 to present)
4%
1%
Federal Reserve Economic Data
How many arrows are left in Greenspan’s quiver?
Federal Funds Rate (1994 to present)
1%
1%
Federal Reserve Economic Data
Federal funds rate target: 1% since June 2003
Discount Rate (1994 to 2003)
primary credit rate = 2.25%
0.75%
Federal Reserve Economic Data
The discount rate was lowered to 0.75% in late 2002.
Primary Credit Rate (2003 to present)
Federal Reserve Economic Data
The Fed now has the primary credit rate above the
fed-funds rate instead of a discount rate below it.
M1 Money Stock (1959 to present)
Federal Reserve Economic Data
Should the Fed return to money-growth targeting?
Currency Component of M1 (1947 to present)
There has been a dramatic rise
in the currency ratio (C/M1)
during the last 10 years:
1993: C/M1 = 28.5%
Federal Reserve Economic Data
2003: C/M1 = 50.7%
Operating ratios are much less predictable
than in the heyday of monetarism.
INCOME VELOCITY OF MONEY
pre-1980’s trend in velocity
actual velocity of M1
Adapted from Brad DeLong’s
“Triumph of Monetarism?”
Journal of Economic
Perspectives, Winter 2000
1960
1970
1980
1990
2000
“T R E N D” I N V E L O C I T Y
pre-1980’s trend in velocity
10
8
6
4
2
0
1960
1970
1980
1990
2000
1“T R17 E33N 49D” 65I N81 V97 E113L 129
145
161
177
OCITY
Gross Saving (private and corporate)
in billions of dollars (1994 to present)
Likely movement in the
deficit-to-saving ratio:
D/S = 35.7%
Federal Reserve Economic Data
The D/S ratio measures the extent to which the
government is a Big Player in credit markets.
FISCAL STATEGISTS ARE CONFRONTED WITH A
SHORT LIST OF BAD OPTIONS
BORROW DOMESTICALLY
High interest rates
MONETIZE DEBT
Inflation (with leverage)
BORROW ABROAD
Weak export markets
RAISE TAXES
Dampened market activity
CONTINUE DEBATING
Market uncertainties
Gross Federal Debt in billions of dollars (1939 to present)
Federal Reserve Economic Data
Which way is the government’s debt headed?
Anatomy of a Market Meltdown
Roger W. Garrison
Auburn University