The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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January 30, 2009

Layoffs: The new problem?

Across the United States and Europe there was a wave of layoff announcements this week, with more than 70,000 job cuts announced on Monday alone. Another 11,500 job cuts were announced on Tuesday, bringing the total to a little more than 200,000 layoffs announced during the first month of the year (announced layoffs January 2009). Also, the U.S. Bureau of Labor Statistics (BLS) reported Wednesday that job losses in December 2008 associated with mass layoff events (those that involve at least 50 initial claims for unemployment insurance) were up 55 percent versus a year earlier. During January, layoffs have spread to more industries and to companies from Microsoft to Starbucks to the world's largest manufacturer of construction equipment, Caterpillar, all of whom announced layoffs this week.

While layoffs have received quite a bit of attention, they were only part of the story of labor market problems in 2008—which makes the accelerating layoff reports especially bad news.

According to the latest data from the BLS Job Openings and Labor Turnover Survey (JOLTS), the layoff rate (as a percent of total employment) increased from 1.3 percent at the start of the recession in December 2007 to 1.6 percent in November 2008. Over the same period, the rate at which workers quit their jobs declined from 1.8 percent to 1.4 percent—likely a result of uncertain job prospects. On net, the overall rate of job separation toward the end of 2008 was similar to what it was at the beginning of the year. The total number of separations stood at about 4.3 million in November 2008, compared to 4.4 million in December 2007.

While the rate of total separations was relatively steady during 2008, a more notable change can be seen in the hiring rate (as a percent of total employment), which declined from 3.4 percent to 2.6 percent. The level of hiring is estimated to have been about 3.5 million in November 2008, compared with 4.7 million in December 2007.

The chart below highlights the rapid decline in hiring relative to layoffs.


Not only have firms been letting people go, they apparently have taken down the help wanted signs at an even faster rate. As a result, the unemployed have fewer employment options, and this development has exacerbated the duration of unemployment. From the BLS household survey, in December of 2008 the average duration of unemployment was 19.7 weeks, compared with 16.5 weeks in December of 2007. This lengthening in the duration of unemployment is also reflected in the Department of Labor weekly claims data released yesterday that showed the four-week average number of continuing claimants for unemployment insurance at 4.63 million during the week of January 16, compared to 2.65 million in mid-December 2007 (see the chart below).


Unfortunately, the growing indication is that "furlough, wage reductions, hiring freezes and shorter hours simply did not do enough" to deal with weak business conditions. Barring a pick-up in job creation—which is unlikely given the recent pattern of continuing claims for unemployment insurance—it is hard to paint a very positive portrait of the labor market in the near term.

By Menbere Shiferaw and Sandra Kollen, senior economic analysts at the Atlanta Fed

January 30, 2009 in Data Releases, Labor Markets | Permalink


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No jobs equals no recovery. In a world suffering from 'over-capacity' (as well as too much debt) we see the absurdity of attempting to re-capitalize the banking system.

All economies are local. Until the currency manipulation stops, there will be no economic recovery.

Do not delude yourself into thinking the general public does not recognize this, to do so invites revolution.

Posted by: Gegner | January 31, 2009 at 05:48 AM

Here's 3 job sites from about.com's top ten job sites-

www.linkedin.com (professional networking)
www.indeed.com (aggregated listings)
www.realmatch.com (matches jobs based on your skills)

good luck to those looking.

Posted by: susan | January 31, 2009 at 02:16 PM

My own view is that, starting in late November, businesses starting shedding jobs proactively:


"It's hard to estimate when markets will bottom and then how long they'll be there," Cutler said in an interview. "The management team has been through multiple recessions, and knows you have to attack cost structure very early. If you don't attack them early, you can never get ahead of them."

Is there any way that I can gauge this thesis?

Posted by: Don the libertarian Democrat | January 31, 2009 at 10:47 PM

The graphs suggest a "depression" - namely, surplus out-of-work labor. Bureaucratic group-think like BLS distinctions between those still "looking-for-work" and those who have "given up" are meaningless [given up to what? crime? starvation? suicide?]. Gee - remember "creative destruction"? - it was supposed to replace destroyed jobs. Well, all we have now is destruction. When we come out of this we will have another post-depression generation: the 50 to 20-somethings will walk away from capitalism/finance/mercantilism as it exists today. The current seismic financial events really will redirect the relationship between worker and job. I'm not a socialist/communist but I sense that "free market" capitalism is done for in the USA for about 5 decades. The worker lives longer than the corporation these days - it is the generational memory that will call the shots in the future. In some form there will be a resurgence in "worker solidarity" - whatever that means. Mercantilims will naturally try to restrict labor union activities. The worker of tomorrow won't be interested in contesting labor/management issues. Deep-rooted cynicism and the social acceptance of widespread under-employment and consumer gadget poverty will mean they'll just walk away from supposedly attractive opportunities.

Posted by: Bruce H | February 02, 2009 at 01:17 AM

an interesting article, thanks. This one that appeared in the Nation, recently, seems to point to a new way of looking towards our future economy. I'd be curious to hear more economists and blogs talking about these type of ideas. http://www.thenation.com/doc/20090209/barber

Posted by: AlbertKaufman | February 02, 2009 at 02:16 PM

Oh yeah, and it ain't over when they tell you it's over. My boss told us all who survived last week's decimation to clean up our work areas and don't leave anything around that would be a real pain if he had to pack it up and ship it to us at home, get the personal stuff out of the office now.

Just, you know, to save him a little trouble just on the off chance the management decides to cut another ten percent, because it was _so_ hard boxing up the crap from the 20-year people laid off last time who'd accumulated SO much garbage around their work areas that was personal.

And breakable. And easy just to throw in boxes or leave for the vultures.

Threaten much?

Posted by: me | February 03, 2009 at 11:10 PM

This piece, like many on macroblog, focuses on the predictive power of certain economic data. As such, this data is harrowing because it so strongly suggest a longer, deeper recession. But of more interest for a policy maker is the "why" of this data, or, in other words, can we posit and prove the causation of this recession which even a casual observer knows to be qualitatively different than earlier, post WW II US recessions.

Is a possible cause the same as the Great Depression, i.e. an extraordinary inequality in income, except that the inequality must be measured world-wide, not US-wide. If we look at incomes in China, India and other less developed countries making consumer goods for the United States market, would we not see not only income inequality within their own economies, but also rather stark contrasts with the income of the developed world? Perhaps this is the systemic source of inadequate consumer demand and a market doomed to severe "correction."

Hence, maybe old economic lessons give new explanations for the current recession that grips the world, not just the U.S.labor force.

Posted by: mme | February 04, 2009 at 07:06 AM

An equally disconcerting, and new, pattern is the sheer number of Wage Reductions being announced almost daily, whether direct across-the-board cuts of -5% or more, or in the form of mandatory 2-day per month furloughs, effectively a -10% wage cut, as affects California's 300,000 State employees.

In downturns there are generally many layoffs, but I can not recall a time of so many reductions in wages.

So far, Demand is weak because of economic uncertainty and risk-aversion. But with more unemployed, and especially, those still employed with less discretionary $, Demand could be further weakened. The risks of a deflationary spiral are high.

Posted by: Murph | February 05, 2009 at 04:33 PM

I noticed that your unemployment claims chart is seasonally adjusted. How does that relate to the hirings chart that showed a large downward movement in hirings during the holiday season? Are seasonal jobs not mentioned in the hiring information?

Posted by: Ian | February 11, 2009 at 04:05 PM

Our economy will soon recover from economic crisis, just look at the positive side. We can see that the video games industry continue to progress.

Posted by: wow gold | March 26, 2009 at 03:47 AM

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January 26, 2009

The piggybank effect

During the 2002–2007 economic expansion, the personal savings rate fell to below 1 percent of disposable income. The savings rate had declined steadily from over 12 percent in the 1980s' recession. What changed the way people allocated their budgets?

U.S. household wealth grew considerably as home prices and the stock market soared. According to the Wall Street Journal, "Starting in the late 1990s, soaring stocks made Americans feel richer…. Savings jumped for a bit following the 2001 recession, but plummeted afterwards as housing prices rose, again making Americans feel that it wasn't especially important to save."

Behavioral changes across generations may have also affected the attitude toward savings and debt. A study by McKinsey Global Institute shows that baby boomers' reduced savings is what accounts for most of the collapse in the U.S. household savings rate.

Some have been saying that over the past several years Americans had been "living beyond their means," saving little and shopping conspicuously. According to Merrill Lynch economists, the average household owns nearly $40,000 of nonhousing durable goods assets, a number that has tripled since the mid-1980s.

Since the economy slowed last year, consumers have become more cautious with their income. This fact is not surprising given record lows of consumer confidence, declining house prices, a sharply lower and still volatile stock market, and mounting job losses. Consumers now appear to be shifting toward saving. By November 2008, the personal savings rate rose to 2.8 percent. Many expect it to increase further. According to several forecasters, the savings rate is likely to reach nearly 5 percent by 2011, reducing spending relative to what it had been before the recession.


But what will happen when the economy starts growing again? Will consumers behave the same as in the past, returning to lower savings and higher spending? Or will a more frugal mentality continue?

Some Merrill Lynch economists believe this time the rising savings rate is a secular trend. According to them, attitudes toward spending and debt have changed semi-permanently, and the United States is facing what they term a frugal future. However, Macroeconomic Advisers and Oxford Economics estimate the savings rate will begin to decline somewhat as the economy gathers steam in 2011, although it will still remain higher than in 2005–2007. The forecasters think Americans will save between 2.5 percent to 4.5 percent of their disposable income after this recession runs its course—hardly frugal, but perhaps not "beyond their means."

By Sandra Kollen and Galina Alexeenko, senior economic research analysts at the Atlanta Fed

January 26, 2009 in Business Cycles, Saving, Capital, and Investment | Permalink


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My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue.

Actually, that is my prediction.

Posted by: esb | January 26, 2009 at 10:01 PM

The Fed's data on consumer purchases of durable goods shows a different picture than the comment implies. The net purchases were around $100 billion in the mid 80s, fell to about $50 after the 90 recession, then rose to about $200 prior to the 01 recession. The interesting part is that it peaked prior to the 01 recession and was very stable until the recent decline. Of course, this only relates to what consumers were spending, it says nothing about their means.

Posted by: Douglas Lee | January 27, 2009 at 11:14 AM

I guess the recession is my fault. My wife and I save about 30% of our income, we have no debt, we rent, and we don't own anywhere close to 40K worth of stuff, durable or otherwise. I'm sorry. Clearly we're failures as American consumers. So we obviously deserve to be punished by having the value of our savings (our work) be destroyed by the Fed's inflationary policies. It's only right that asset prices be propped up by government action. Since the prosperity of the past decade or so was an illusion propped up by debt, the best course of action is to make sure the debt bubble continues to grow. That's the road back to real wealth.

Posted by: Moopheus | January 27, 2009 at 01:30 PM

Why stop at 5%? The Baby Boomers are not going to be able to retire unless they save about the same as people saved in the 70s and 80s which is more like 10%. In fact, one would think that they need to save more like 20% to make up for their lack of savings over the past 10 years.

Posted by: David | January 27, 2009 at 10:43 PM

Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits.

Posted by: DR | January 28, 2009 at 10:25 AM

Nice piece, but I'd add two things. First, a lot of US saving shows up as savings by firms, since the tax system discourages distributions of earnings. Since firms are (on the whole) owned by people, it's somewhat misleading to look at personal saving on its own. Second, none of the standard saving rates include capital gains. You hint at this in your piece, but don't explain why, if saving is so low, we have so much net worth. (Less now, of course.) It would be nice to add, for example, a graph of the ratio of household net worth to GDP, or something like that. All of this and more is laid out nicely in a 1999 Brookings article by Gale and Sabelhaus.

Posted by: Dave Backus, NYU | January 29, 2009 at 08:43 AM

In order to compare: What are the saving rates in other countries?

Posted by: martin gale | January 29, 2009 at 09:34 AM

I'd love to see that chart back to fifties, and overlay real (un-Boskinized unhedonized) interest rates against it. Maybe people are more clever than believed.

From a different angle, meaningful modern measures of "savings" should perhaps include some measure home equity, mutual funds, directly-held shares, annuity and insurance-wrapped products, PV of defined benefit plans, and as DR points out 401k and defined contributions plans. Cash in the bank isn't what it used to be in any event.

Posted by: Cassandra | January 29, 2009 at 03:02 PM

"My fear is that this summer, should the cost of gas remain near 2.00, that essential symbol of the American, the SUV, will be back in vogue."

Only for the people who can get loans and still have secure jobs, who are also short-sighted schmucks.

Posted by: Jon H | January 29, 2009 at 06:18 PM

"Does this savings rate include 401Ks? It is only logical for boomers to save to a tax deferred 401k before putting money into taxed time deposits."

Lots of my friends are transferring cash from 401K to savings/checking for ready access. I wonder if this is a contributor to why the savings rate has increased suddenly.

Posted by: Mark Summers | January 29, 2009 at 06:30 PM

I agree with Cassandra, and others.

The baby boom often started their careers late (or switched careers) and put heavy demand into home ownership, plus had to fund their own pensions (a mixed blend, starting out with defined benefit, that went away, and transitioning into defined contribution). These are responsibilities that previous generations did not have as explicitly.

This has been a generation transitioning through all kinds of structural changes in an economy with declining marginal rates of growth. Plus during boomer lifetimes (OK, I am one), we have monetized a lot of labor (parenting, caregiving, meal preparation, etc.).

Ergo, we really do need to think carefully about how we are measuring 'savings,' and what it means since the structures and personal responsibilities of people's lives have changed dramatically.

Posted by: Laocoon | January 30, 2009 at 10:57 AM

Countries differ in the way household disposable income is reported (in particular whether private pension benefits less pension contributions are included in disposable income or not), therefore the comparison between savings rates in the United States and other countries could be difficult to make. However, the OECD adjusts for this difference when reporting savings rates in the member countries. In 2007, the savings rate in the OECD countries ranged from 13.1% in France to a negative 3.6% in Finland. Australia’s savings rate was reported at 0.3%, and the United States had the third lowest at 0.7%. Savings rates in Austria, Germany, Sweden, Switzerland, Belgium, and Spain were around 10%. Japan’s savings rate was reported at 3.2% and Korea’s at 3.9%.

Employee contributions to 401(k)-type plans are part of wages and salaries (a gross concept before deductions) in the period of the contribution. They are not part of outlays, and therefore are included in personal saving in the period of the contribution. Employer contributions to 401(k)-type plans are part of employer contributions for employee pension and insurance funds in the period of the contribution. Therefore, these contributions are included in personal income, they are not part of outlays, and are therefore included in personal saving in the period of the contribution.

Posted by: Sandra and Galina | February 05, 2009 at 10:58 AM

Common sense would indicate that a diversion from consumption to savings would represent a drag on economic growth. Indeed, the UST estimate that a move to 5% personal savings would sap $500bn from global demand (including multiplier effects). So, in the short-term, higher personal savings = bad for growth. The degree to which this personal saving is off-set by govt dis-saving will, I suppose, depend on the degree to which Ricardian equivalence holds, and the different multipliers that might attach themselves to household vs govt spending.

However, both neoclassical and endogenous growth theory appear to indicate that a shift to a higher savings rate leads to an increase in the level of GDP (in the case of neoclassical gt), or indeed the pace (for endogenous gt). So higher saving = good for growth (at the very least by moving steady state to a higher level assuming no technology).

Keynesian national accounting identities equate saving with investment. So doesn't have much to say about the impact on growth I guess.

And at a global level NET debt must always be zero, so there can be neither leveraging or deleveraging at the system level (although there could be among different sectors).

Please disentangle my confusion.

Posted by: Confused about saving | February 05, 2009 at 11:49 AM

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January 22, 2009

A look back at the economy, in presidential terms

In his inauguration speech on Tuesday, President Barack Obama said, "That we are in the midst of crisis is now well understood… Our economy is badly weakened…. Homes have been lost, jobs shed, businesses shuttered…These are the indicators of crisis, subject to data and statistics."

Tuesday, Jan. 20, 2009, was a day filled with excitement and hope but also with uncertainty for the outlook of the American economy. Few doubt that our new president has a daunting task at hand. In fact, there are only two other U.S. presidents (Kennedy and Ford) in the post–World War II period who have entered office while the economy was in the midst of a recession.

Today's economy and its circumstances are constantly changing, and today's situation is quite different from previous experiences. With that in mind, we thought it would be interesting to look back at economic conditions when past presidents have entered office. Below are a few charts and facts describing the current state of the economy alongside historical conditions other post–World War II presidents had to deal with when entering office.

After contracting 0.5 percent in Q4 2008, economic growth for the first quarter of 2009 is expected to come in around –5 percent, according to the Bloomberg consensus forecast. This would mark the largest quarter-over-quarter contraction since the recessions in the early 1980s.


The employment picture also is grim, with December payrolls showing the largest year-over-year decline since December 1982 and unemployment in a significant upswing.


Headline CPI contracted 0.1 percent in December from the previous year (seasonally adjusted), marking the first time the monthly indicator was negative on a year-over-year basis since 1950.


Industrial production continued to dip in December with the worst showing since the 1975 recession.


So there you have it—a look at the economic picture in historical context as President Obama begins his journey as America's forty-fourth president.

By Courtney Nosal and Laurel Graefe, economic research analysts at the Atlanta Fed

January 22, 2009 in Business Cycles | Permalink


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I posted a graph yesterday at Econosseur.com, similar to those you have posted here, that charts the annual U.S. deficit as a percent of GDP over time with the NBER recessions and presidential inaugurations. The story that I take away from this analysis is that all presidents who enter office in a recession run up the deficit. We don't have any data as to what would happen if the government didn't respond to an economic crisis with fiscal stimulus.

Posted by: Rick | January 22, 2009 at 04:15 PM

In terms of managing liquidity, consumers can view debt and savings as interchangeable. Therefore as debt becomes more available and cheaper; consumers will reduce their savings. During the rise in home prices, debt was mis-priced (in part because measures of inflation did not account for asset price inflation) so consumer gladly substituted debt for savings.

This is good news because it allows (forces) the government to run a larger deficit every savers need a borrower and right now only the government has the borrowing power left to satisfy the savings desire of consumers.
Now that the credit crisis has made debt more expensive and reduced its availability, consumers seek to rebuild their savings to maintain a desired liquidity cushion.

Posted by: Rajesh Raut | January 27, 2009 at 10:21 PM

I posted a graph yesterday at Econosseur.com, similar to those you have posted here, that charts the annual U.S. deficit as a percent of GDP over time with the NBER recessions and presidential inaugurations. The story that I take away from this analysis is that all presidents who enter office in a recession run up the deficit. We don't have any data as to what would happen if the government didn't respond to an economic crisis with fiscal stimulu

Posted by: Nokia | March 03, 2009 at 09:36 AM

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January 15, 2009

What, exactly, is the Fed trying to do?

There has been, of late, no shortage of official voices devoted to answering the question posed in the title of this post. Chicago Fed President Charles Evans, San Francisco Fed President Janet Yellen, Richmond Fed President Jeff Lacker, Philadelphia Fed President Charles Plosser, and Chairman Bernanke have all given speeches in the last two weeks outlining their version of answers to this question. Add to that list Federal Reserve Bank of Atlanta President Dennis Lockhart, who laid out his own views at a speech to the Atlanta Rotary Club this past Monday and again today at the University of Southern Mississippi's Outlook for South Mississippi Conference. Here's what he said:

"The Fed, as the country's central bank, conducts monetary policy—as distinct from fiscal policy—under legal mandates set down by Congress. The Fed's mandated policy objectives—the so-called dual mandate—are sustainable economic growth along with low and stable inflation.

"The mandates have not changed. But what has changed is some aspects of how we pursue those objectives. Extraordinary circumstances this last year and a half have required the Fed to expand the set of tools employed to meet those objectives."

What is the practical implication of those circumstances?

"The federal funds rate is a very general tool and one that relies on the functioning of credit markets to have its intended effects. But, as you know, credit markets have not been functioning normally even in markets strongly backed by the U.S. government, such as agency (e.g., Fannie Mae and Freddie Mac) mortgage-backed securities….

"Among the programs in force is the direct purchase of agency (Fannie Mae, Freddie Mac, etc.) notes and mortgage-backed securities. These securities are directly linked to mortgage rates. Purchases began just a few days ago. The goal of such a program is not, in my view, to engineer a particular interest rate level, that is, to hit a particular rate target. But direct purchases can promote directionally lower rates, help restore normal market functioning, and thereby achieve a return to reliance on private sector market-based credit allocation.

"The introduction of targeted asset-side measures has been aimed squarely at the breakdown of credit markets, the circulatory system of our modern economy. In my view, a precondition of economic recovery is the return of the normal functioning of credit markets."

Sometimes, if I may paraphrase, deviating from business as usual is the best way back to business as usual.

Podcast Icon President Lockhart's Speech
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From the Atlanta Fed Speeches podcast series

By David Altig, senior vice president and research director at the Atlanta Fed

January 15, 2009 in Federal Reserve and Monetary Policy | Permalink


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What if the credit markets are, in fact, functioning normally? Would it be "normal" to lend to insolvent financial institutions, consumers who have lost their jobs, credit card abusers who have more debt than they can pay off, home buyers who want a loan at 5x income, or real estate developers who want to build in the face of massive commercial and residential inventory?

What if, after a massive lending and leveraging binge, there simply aren't that many good potential borrowers out there who actually want to borrow? If this is the case, then all of the Fed's work to free up credit will have no effect.

Posted by: Groundhogday | January 16, 2009 at 05:19 PM

Wasn't it the "business as usual" of the last few years that got us into this mess?

Posted by: John | January 23, 2009 at 06:05 AM

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January 13, 2009

On expanding balance sheets and inflationary policy

Here's a question I hear a lot (most recently during the Q&A portion of a speech delivered yesterday by my boss, Atlanta Fed president Dennis Lockhart): Has monetary policy become so expansive that the central bank's mandate to maintain price stability has been fundamentally compromised? Is the increase in the scale of the Federal Reserve's balance sheet inherently inflationary?

Jim Hamilton covered much of the territory implied by these questions in a very extensive Econbrowser post not too long ago, but the distinction between money creation and Fed balance sheet expansion continues to be confounded. Here, for example, is a passage from the Wall Street Journal's Real Time Economics coverage of Stanford professor John Taylor's (not exactly glowing) review of recent Federal Reserve action, delivered at this year's annual meeting of the American Economic Association:

"The Fed has launched nearly a dozen new programs in the past year to address the crisis. Its strategy is to target specific markets in distress—from commercial paper to asset backed securities to money market mutual funds and stresses overseas—with programs tailored to their problems. It also has gotten deeply involved in rescues of individual firms like Bear Stearns, American International Group and Citigroup.

"The Fed has funded these programs by pumping reserves into the banking system—essentially creating new money. In the process, its balance sheet has ballooned from less than $900 billion to more than $2 trillion."

The record though, as the article goes on to note, is that not all of that $2 trillion represents an increase in the money supply:


Only the blue portion of the graph above represents "pumping reserves into the banking system"—a fact that was covered pretty well in the aforementioned Econbrowser post—and in an even earlier post at News N Economics. In simple terms, the size of the Fed's balance sheet is not the same thing as the size of the monetary base (the sum of currency in circulation and reserve balances kept by banks with the Federal Reserve).

Of course, John Taylor's point was not that all of the increase in the balance sheet has amounted to pumping in reserves, just that a lot of it has, which is clearly true. But even here there may be less to the potential inflationary impact than meets the eye. In his speech at the London School of Economics earlier today, Chairman Bernanke explained:

"Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base."

Last week Greg Mankiw had a nifty graph (courtesy of Professor Bill Seyfried of Rollins College) of the so-called money multiplier precisely illustrating the point:


The money multiplier measures the amount of money in the hands of the public—the M1 measure in this case, which is composed mainly of cash and demand deposits (i.e., checking and debit accounts)—that are created by a dollar of monetary base. That amount fell considerably when the Fed introduced the payment of interest on bank reserves.

That said, despite the fall in the money multiplier, the M1 measure of money has also expanded fairly noticeably since late summer:

(Note: This chart replaces the original chart in the blog posting on 1/13/09, which had a mislabeled left axis.)

The increase in M2—a slightly broader measure of money that adds to M1 items like savings accounts and time deposits—has been somewhat slower but still on the rise:

(Note: This chart replaces the original chart in the blog posting on 1/13/09, which had a mislabeled left axis.)

From December 2007 through August of last year, M1 and M2 grew by about 1.2 percent and 3.9 percent respectively. Since September—after which the rapid expansion of the Fed's balance sheet began and the Fed began to pay interest on reserves—the corresponding growth rates have been 13.4 percent and 5.9 percent.

Are those growth rates substantial? That is a tricky question—whether a particular growth rate of money is substantial or not can only be determined in relation to the pace of money demand (which has almost certainly accelerated as interest rates have fallen and the taste for safe and liquid assets risen). But I take two lessons from our early experience with the asset-oriented policies emphasized in the Bernanke and Lockhart speeches. First, expansions of the balance sheet need not imply expansions of the money supply. Furthermore, as Chairman Bernanke emphasized, the Fed has the capacity to contract reserves going forward:

"… the Treasury could resume its recent practice of issuing supplementary financing bills and placing the funds with the Federal Reserve; the issuance of these bills effectively drains reserves from the banking system, improving monetary control. Longer-term assets can be financed through repurchase agreements and other methods, which also drain reserves from the system."

The second lesson, clear in the M1 and M2 charts above, is that despite the payment of interest on reserves and near-zero federal funds rates, it is still possible to induce increases in the broad money supply through the standard channel of injecting reserves into the banking system.

Whatever direction you think the money supply ought to go, these observations should come as comforting news.

By David Altig, senior vice president and research director at the Atlanta Fed

January 13, 2009 in Federal Reserve and Monetary Policy, Inflation | Permalink


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Several points for emphasis:

First, most of the increase in the size of the Fed’s balance sheet reflects an increase in the size of the monetary base. The primary exception has been the program of government deposits held at the Fed, which has been confirmed to be temporary, notwithstanding the option of reintroducing it at a later date.

Second, increases in the monetary base coincide with at least first order increases in broad money supply, although some of this money might be used to pay down bank credit immediately, thereby eliminating the broad money form just created. More generally, macro “deleveraging” has resulted in slower overall net growth of credit and money than would normally be the case, given such a provision of excess reserves. The collapsing “money multiplier” reflects a reduction in the usual leverage associated with excess reserve supply, because monetary policy is working uphill in an attempt to offset these forces of contraction. It is the effect of policy on the counterfactual that should be judged.

Posted by: JKH | January 14, 2009 at 07:54 AM

A more prosaic point. I think that the money stock numbers on the graphs should be trillions not billions.

Posted by: RebelEconomist | January 14, 2009 at 11:37 AM


Why should we care about the direction of the M1 multiplier? Isn't the absolute level more important?

Say the Fed injects $1tr in reserves at a multiplier of 1.0, or injects $3tr in reserves at a multiplier of 0.5. Which is potentially more inflationary? I would argue the latter.

As far as demand for money balances, I'm surprised you didn't mention that GDP is contracting and that M1 growth FAR exceeds nominal GDP growth. Some might suggest this is inflationary. It is up to Bernanke and others (including your boss) to explain why its not. Further, the behavior of M1 and M2 differs markedly from that of deflationary analogies like Japan and the U.S. during the Great Depression.

Finally, it appears that the Fed is being less than honest when it talks about the difficulty of removing reserves. In the last recovery -- from a shallow recession -- the same Fed engaged in "measured pace" hand-holding until commodity prices began to go haywire. Why should one expect this next recovery to be any different when we will be: a) coming out of a deeper contraction; and b) coming out with much faster growth in broad money measures?

Posted by: David Pearson | January 14, 2009 at 11:50 AM

The discussion of the Fed's "proper" role ignores the fact that the Fed is practicing price controls (on money).

In Greenspans book, The Age of Turbulence, there's a passage on page 297 where Greenspan describes his debate with Li Peng and Greenspan told Li Peng that the US tried price controls (under Nixon) but learned that they don't work and learned not to do them.

Apparently not.

Posted by: George | January 14, 2009 at 12:13 PM

Simply put, the fed is leveraging up big time to allow the financial system leveraging down. I am curious: anyone know how much accouting capital the Fed has?

And please don't tell us that it can "easily reserve" these actions: we heard that in 2003-2004, look what that brought us.

Posted by: marie | January 14, 2009 at 03:15 PM

One of the best explanations I've ever seen.

On September 11th 2001, the FED expanded its balance sheet and I didn't hear any economist saying that US should care about inflation.

Probably this time the expansion of the balance sheet is staying for enough time so those economist that do not understand monetary policy and financial markets can worry about it.

Thanks David!

Posted by: El del 0.33% | January 14, 2009 at 11:10 PM

When Bernanke says "However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed.", surely he recognizes that only the Fed can create or destroy overall reserves in the system. Excess reserves are thus a pre-ordained number and banks can only shift around reserves from one to another.

Posted by: Mojakus | January 15, 2009 at 09:11 AM

Eh David: Care to address those comments above? It seems that your observations did not come as comforting a news as you expected .

Posted by: JAL | January 28, 2009 at 04:13 PM

Great idea, but will this work over the long run?

Posted by: Roulette_Albert | July 13, 2009 at 01:47 PM

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January 07, 2009

Will tax stimulus stimulate investment?

Update: Reader Doug Lee points out that the fixed investment series above is dominated by the extraordinary decline in residential investment over the past several years. For that sector, the questions posed above are in a bit sharper focus. Are firms in the residential investment sector pessimistic about future prospects? Absolutely. Are compromised credit markets behind the low investment levels? Quite possibly, though given the large inventory overhang in housing it is improbable that activity in the sector would be robust in any case. Is the low investment/net worth ratio symptomatic of a general deleveraging within the nonfinancial business sector? Not so clear, as it is pretty hard to see through the effect in residential category.

Here, then is a chart of the history of nonresidential fixed investment relative to corporate net worth:


The recent decline in the ratio, while still there, is much less dramatic and, in fact, seems to be part of a more persistent trend that commenced prior to the 2001 recession (and which may have been temporarily disguised by the housing boom that followed).

Was the nonfinancial nonresidential business sector ahead in the deleveraging game—ahead of residential construction businesses, financial firms, and consumers? And could this bode well for this sector when the recovery begins? Unfortunately, I have more questions than answers.

By David Altig, senior vice president and research director at the Atlanta Fed

Original post:

On Monday, the form of potential fiscal stimulus, 2009-style, took a step forward detail-wise. From the Wall Street Journal:

“President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.

“The size of the proposed tax cuts—which would account for about 40% of a stimulus package that could reach $775 billion over two years—is greater than many on both sides of the aisle in Congress had anticipated.”

The plan appears to make concessions to both economic theory—which suggests that consumers will save a relatively large fraction of temporary increases in disposable income—and recent experience—which seems to suggest that what works in theory sometimes works in practice. Again, from the Wall Street Journal:

“Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it. But Obama aides wanted a provision that could get money into consumers’ hands fast, and hope they will be persuaded to spend money this time if the credit is made a permanent feature of the tax code.”

As for the business tax package:

“… a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.

“A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don’t sit on their money until after Congress passes the measure.”

A relevant question here is really quite similar to the one we ask when the tax cuts are aimed at households: Will the extra cash be spent? This graph provides some interesting perspective:


Relative to net worth (of nonfarm nonfinancial corporate businesses), private fixed investment has been in consistent decline since the second quarter of 2006. (The level of fixed investment has declined in each quarter, save one.) In fact, the investment/net worth ratio is currently at a postwar low.

Why? A couple of hypotheses come to mind. (1) Firms are extremely pessimistic about the outlook and see relatively few worthwhile projects in which to commit funds. (2) Credit markets are so impaired that the net worth of firms—a critical variable in mainstream models of the so-called “credit channel” of monetary policy—is supporting increasingly smaller levels of lending. (3) Nonfinancial firms, like financial firms, are deleveraging and hence not expanding.

Of course, even if one of these hypotheses is true, it need not be the case that marginal dollars sent in the direction of businesses will go uninvested. But it makes you wonder.

By David Altig, senior vice president and research director at the Atlanta Fed

January 7, 2009 in Capital Markets, Saving, Capital, and Investment, Taxes | Permalink


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Very interesting to see some real data on this, which seems to support recent anecdotal evidence. I have written up two separate but related thoughts on stimulating business investment:

1. Should the stimulus aim at boosting investment instead of consumption, and how? http://www.knowingandmaking.com/2009/01/stimulus-spend-invest-or-incentivise.html

2. Should central banks consider equity investments if debt instruments are not effective in routing funding to the non-financial sector? http://www.knowingandmaking.com/2009/01/private-investment-by-central-banks.html

Posted by: Leigh Caldwell | January 07, 2009 at 11:10 AM

The loss carry back provisions seem to me like a particularly poor way to encourage investment and seem to smack of political pork to produce big transfer payments to financial sector companies. An investment tax credit would be much better, but I suspect investment demand is inelastic with respect to the cost of capital so most of the credit would go to projects that would have been undertaken anyway. Summers touted investment tax credits for machinery and equipment at one time. Has he been intimidated by the comment that crushed his research findings on the topic?

Posted by: don | January 07, 2009 at 02:00 PM

Since it seems to be a key question at the moment, can someone (Dave?) please explain to me why it matters whether a stimulus is saved or spent? Surely, in order to save it is necessary to find someone to lend to (even just holding a banknote is effectively an interest-free loan to the government). And they are not going to borrow unless they have a use for the money, so any money that is saved must be spent anyway.

Posted by: RebelEconomist | January 09, 2009 at 04:11 PM

Very interesting data indeed. Especially when you cross pollinate the data with Greg Mankiw's that shows that tax cuts have a greater effect on GDP than government spending.

We are in a deflationary time. Everything just gets cheaper. I don't view it as a spiral, because we were severely overleveraged. Once the leverage of the market reaches equilibrium, there should be some stable footing.

The government spending package will of course have a bunch of lard in it. Unfortunately, it will be too big, and because the government can't keep it up forever, people will save instead of spend. The jobs created for road building and bridge building are temporary. Once the road is built, the job goes away.
There will be some ancillary jobs that remain, but those will be small.

The way to really get business to invest is to make the cost of investing a lot cheaper. Businesses view taxes as a cost, so lower the corporate tax rate and the capital gains rate a bunch. This will spur business investment in long term capital projects that will encourage long term economic development.

But the bureaucrats in DC and Congress don't think that way.

Posted by: Jeff | January 12, 2009 at 08:46 AM


Very clear analysis, and reasonable conclusion. It's nice to read something about the stimulus subject that isn't completely guided by preconceived notions and admits to ambiguity.

Posted by: Bob_in_MA | January 12, 2009 at 08:46 AM

How about redistributing purchasing power through the tax system?

Poor people generally spend more of an extra dollar than rich people do. So redistribution can be expected to boost aggregate demand without simultaneously boosting public deficits.

Even weak households can of course be expected to save some of the extra dollars. Given their indebtedness, that’s not a bad thing.

One may argue that poorer people spend their dollars differently from richer. But many products sold lately were anyway meant to satisfy needs for rather conspicuous consumption. More resources must be allocated to the satisfaction of (slightly) more basic demands.

Growing inequality is a major explanation for the crises. For many households credit growth has worked as a substitute for wage growth.

This process will have to be reversed one way or another. We must make sure that wage differentials decreases rather than the opposite. In addition to tax breaks for the weaker households, mortgage assistance is needed.

When you run out of helicopters, distribute fresh money through increased unemployment benefits. This will improve the bargaining power of the weakest employees. But make sure the informal economy doesn’t explode. ID-cards for all wage earners are needed!

Jan Tomas Owe

Posted by: Jan Tomas Owe | January 13, 2009 at 08:12 AM

"The way to really get business to invest is to make the cost of investing a lot cheaper. Businesses view taxes as a cost, so lower the corporate tax rate and the capital gains rate a bunch. This will spur business investment in long term capital projects that will encourage long term economic development.

But the bureaucrats in DC and Congress don't think that way."

I agree, but the politicians are intent on solving the wrong problem with the wrong tools. You mention "long term" economic development - everything the Democrats and Obama want to do is SHORT TERM.

If the 'problem' they have to fix is short-term recession fighting, then the only lever that works efficiently at that is federal reserve monetary policy, and they've already done the "flood the zone" approach with 0% interest rates and 'quantitative easing'. Even though unemployment is no higher than in 1992, they want to go far far beyond what has been done in previous recessions. Why? I can think of no reason other than a sense of panic among the political elites, or a desire to misuse a recession for political aggrandizement.

But the short-term is the WRONG PROBLEM TO SOLVE. The correct problem to solve is to set the country back on the path of stable long-term economic growth. When we look back in 2012 at what was done in 2009, we wont care if the Q4 2009 numbers were this or that, we WILL care if we are saddled with an extra trillion of foriegn debt that we can't easily pay back, suffering under subpar growth because our deficits and inflationary policies got out of hand and we had to 'fix' that with high-tax high-interest-rate stagflation-era policies.

It's a myth that govt deficits will reflate the economy. What ever happened to the 'rational expectations' refutation of this? Every attempt to grow the govt will be met by more private sector layoffs - as the private sector realizes they will bear the pain of paying for this mess the govt makes.

Keynes was wrong. In the long run we aren't dead, in the long run we look back, older and wiser, and say: "What the hell were we THINKING?!?"

Posted by: Travis Monitor | January 18, 2009 at 11:32 PM

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