Is Bush "handcuffed" in Economic/Monetary policy ?

[EVDebs]

In macroeconomics they have Swan Diagrams

see http://ksghome.harvard.edu/~avelasco/Files/Research/RR99-15.pdf

and also Mundell Diagrams aka IS-LM-BP diagrams

see http://www-personal.umich.edu/~alandear/glossary/figs/islmbp/islmbp.html

With Swan diagrams, the RE scale represents 'Exchange rate' monetary policies (loose money at the top--low exchange rates, tight money at the base--high exchange rates). Low exchange rates at the top mean policies that do the following: increasing exports, devaluation, and reducing imports. High exchange rates at the bottom of the RE scale mean enacting policies that do the following: increasing imports, decreasing exports and a stronger currency.

Expenditures (domestic absorption) represents budgetary policies (tight budgets at the left base, loose budgets at the right).

When you look at what Bush is doing, letting the dollar drop like a stone...this is the only real policy mechanism he has left ! We're in the Deficit CA current accounts/Recession pyramid at the bottom of the Swan Diagram. The Federal Reserve cannot loosen monetary policy to get us to equilibrium (A) and the government's budget cannot get any looser than it already is in governmental spending deficits !

You can also play around with the Mundell IS-LM-BP Diagram and come to much the same conclusions. This is much like 1961 and also the Nixon years with unemployment stagnation and balance of payments deficits.

Any economics majors or professionals care to comment on the direction of Bush's policies and if they are "correct" or "incorrect" ? Right now they look handcuffed and can only let the dollar fall and tighten the budget (nice trick during wartime)....anything else will only make matters worse.

[stevebreeze]

1. This kind of assumes the * admin uses rational thought

They don't feel they need thought, they have ideology.

[unblock]

3. that was so much more succintly put than my post!

[unblock]

2. the $ decline was an inevitable consequence of his reckless budget policy

the banana republicans let themselves get so blinded by their greed and their hatred of "discretionary spending" that they decided to radically cut taxes and jack up spending in order to deliberately put the nation in a financial straightjacket, so we'd have "no choice" but to eliminate social spending.

what these geniuses didn't think through was that, when you nearly bankrupt the government to squeeze out social spending, ... well, ... you nearly bankrupt the government!

so why would foreign investors invest in a country rapidly being run like a banana republic, especially when there are strengthening and emerging markets in latin america, the european union, and russia (lukos aside)?

letting the dollar fall isn't really much of a bush policy. he doesn't have a choice. the market forces are way too strong to resist.

you just can't go from a few years of surpluses -- paying down the debt -- to budget deficits that not only completely shatter the old records AND not even have a credible plan for restoring any semblance of fiscal sanity and not expect your currency to suffer.

bush is totally at the whims of the markets unless he can get our financial house in order, which isn't even on his agenda. cut the deficit in half in 4 years? please! what kind of lame goal is that?!

[HuskiesHowls]

4. Here are some good explanations of how these affect us

http://www.cbpp.org/

Read some of these and just shake your head, knowing that * knows nothing of "economics" except how to spend recklessly.

[stevebreeze]

5. Center for Budget and Policy Priority's is a great resource

In a similar vein is Center of Economic an Policy Research
http://www.cepr.net/

[Bandit]

6. I say this calls for a tax cut.....

Tax cuts fix everything......

[EVDebs]

7. We're at the lower right-hand triangle of the Swan Diagram

which means "Recession/CA Deficit" or internal recession with an external current accounts (trade) deficit.

The only possibile policies are : Budget tightening (along the "Expenditure" base scale and rate of exchange policies that both raise interest rates, create a dollar devaluation, and reduce imports, all along the "RE" verticle scale--the rate of exchange line.

The federal reserve would have had to do these things anyway since they put us in an almost Japan-like 'liquidity trap' with rates approaching zero. Bush's crazed tax-cuts along with the business world's fixation on "globalization" causes the lower and middle classes to feel the brunt of making up for the elite's tax cuts...the lower and middle class federal tax cuts were eaten up by state and local tax increases.

Warren Buffett has called for increased corporate taxes (see http://www.commondreams.org/headlines04/0306-01.htm ) it will take time for the neocons to wake up or be voted out before SANE economic policies, not supply-side claptrap, is restored.

Heaven help us all until then. It also seems to me that our housing bubble, with most mortgage money going into secondary markets like Fannie Mae and Freddie Mac who take that money and package it into investments that are basically sending local money into the international markets, needs to start changing and making sure that that money 'stays home' and creates JOBS.