So what actions have the U.S government and the Fed taken; one of the first steps was to bail out those firm’s which were deemed “too-big-to-fail” through the Troubled Asset Relief Program (TARP) set up in October 2008, and the since late 2008 the three month Treasury Bill rates have been set to values of 0.04% and less and have also rarely peaked above values of 0.20%. The Fed also engaged on its most aggressive monetary expansion through quantitative easing since the 1930s “Great Depression”.
So far as we can tell to date, the actions taken in by the Fed and US government appear to be managing the downturn: with GDP Growth rates and inflation shown below and Inflation rates for the U.S;
After a sharp but brief slump in 2009 the Gross Domestic Product began to grow again in 2010, similarly after a deflationary period in 2009 inflation has being growing steadily in a controlled manner consistent with successful inflation targeting as a result of effective monetary policy.
While there are lots of similarities between the recessions experienced by the U.S and Japan in the 2000s and 1990s respectively, so far the U.S has not got caught in a liquidity trap. So what might be the difference? One major factor is the U.S demography, were the labour force is buoyed by immigration mainly from Latin American, and a historical tendency not to save among its population.
Does this reinforce theories suggested by Paul Krugman or is there some difference in the nature of the boom’s that causing different features in the bust?
