The 2018 Econ 53 exit lecture
Tax cuts and unauthorized spending increases unambiguouly increase the size of the budget deficit...
... but this is also compounded by the Social Security and Medicare Trust Fund X, which is the real long-term driver From the entitlements lecture.. 1 2 3 t 1 2 3 t
Interest rates... (rising as desired by the FRS):
The theory we used to explain this.. This is the 2017/18 perspective! There is a significant increast the the demand for funds due to the budget deficit arising from tax cuts and unfunded spending increases. But the Federal Reserve can t and won t completely accomodate this because they have a policy designed to slowly pull interest rates up. r 2 r 1 SF 1 SF 2 DF 2 DF 1 Generally, if the FRS keeps reserve growth below the growth of credit demand, rates should rise enough to possibly satisfy both policies. But in your teacher s opinion, the GDP effect should be fairly neutral to slightly positive. Modest growth in supply of funds..... robust growth in credit demand... Volume Credit... results in an increase in interest rates, even though there has been an increase in the supply of funds.
Showing the accomodation through MS2OMO... Default Deficit expansion (w/ crowding out) Monetary accomodation
The complication caused by the trade imbalance.. Trading Partners Goods deficit... must be offset by services and financial flows going the opposite way United States All U.S. International Transactions ($ millions) Goods and Services 2016 Goods exports 1,459,667 Services exports 752,412 Goods imports -2,209,592 Services imports -503,047 Trade balance: -500,560 Financial Transfers (Net) Income receipts (investment etc.) 930,095 Income payments (investment etc.) -910,721 US purchase of overseas financial assets -330,956 US borrowing from overseas 759,370 Primary financial balance: 447,788 Other and statistical discrepency: 52,772 Current Account Balance: 0 Source: BEA U.S. International Transactions All of this links the dual deficits. The reserves generated overseas by virtue of our trade deficit, act as the means, in part at least, to finance our budget deficit. If the FRS cuts back on OMO purchases of UST securities as part of their policy to push interest rates up, this may coincide with a reduction in overseas purchases of the same assets because the trade skirmish will reduce the deficits (very unlikely) or because our trade partners will boycott purchases (especially China).
The current status of the trade skirmish... Most of Trump Admin activity found in (a) aluminum and steel tariffs that have largely been rolled back, except for China and Japan, and (b) the huge Section 301 tariff list that I showed you that largely threatens a huge range of tariffs, with the deadline fast approaching and no one really negotiating. Trump has threatened suspension of NAFTA (Mexico and Canada) and there have been intense negotiations that seem to be going largely nowhere. Who knows how this will turn out. China has been quitely but angrily pushing back by (a) rolling out a range of tariffs for wine, agricultural products effective immediately, then (b) last week imposed a complicated tariff on sorghum that effectively doubles the cost in China, imposing apparently a severe hardship or sorghum importers, (c) threathening many more tariffs and sanctions while (d) refusing to buy any more U.S. Treasury securities. Although no clear economic damage is obvious, this is possible a frog boiling in water enviroment where substantial damage will be done to corporate earnings, therefore the stock market, and to the global economy. I insist that this is more dangerous that it appears to be.... and then there is the Korean situation, which shows promise, but is probably tied up with this.
Memo: Possibilities for MacroSim One of these will likely be done over the summer: 1. Convert to JavaScript to run off the course web site. 2. Find a shock filter that will allow the inclusion of AgSup/AgDem model to allow for an inflation component of the model: a) Ag Demand would be determined by the current level out. b) Default would start at some level of cap util (like 75%) c) A resister would convert the supply curve to quickly vertical. 3. Convert the model to an 8-quarter difference equation model, allowing EWMA, polygon and sigmoid response functions and multiplier/accelerators.