1. Anatomy of a Market Meltdown Roger W. Garrison Auburn University

2. 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.

3. Federal Reserve Economic Data Will the Bush 43 deficit of 2004 be worse than the Bush 41 deficit of 1992? Federal Government Surplus (+) and Deficit (-) in billions of dollars (1925 to present) $293 billion $500 billion Compare deficit-to-GDP: 1992: 293 / 6,184 = 4.7% 2004: 500 / 11,200 = 4.5% Compare deficit-to-saving: 1992: 293 / 1,018 = 28.8% 2004: 500 / 1,400 = 35.7%

4. Federal Government Surplus (+) and Deficit (-) in billions of dollars (1925 to present) $293 billion $500 billion Why can’t we do in 2003 what we did in 1992? ? Federal Reserve Economic Data

5. 4% 1% Federal Funds Rate (1959 to present) How many arrows are left in Greenspan’s quiver? Federal Reserve Economic Data

6. 1% Federal Funds Rate (1994 to present) 1% Federal funds rate target: 1% since June 2003 Federal Reserve Economic Data

7. Discount Rate (1994 to 2003) 0.75% The discount rate was lowered to 0.75% in late 2002. primary credit rate = 2.25% Federal Reserve Economic Data

8. Primary Credit Rate (2003 to present) The Fed now has the primary credit rate above the fed-funds rate instead of a discount rate below it. Federal Reserve Economic Data

9. M1 Money Stock (1959 to present) Should the Fed return to money-growth targeting? Federal Reserve Economic Data

10. Operating ratios are much less predictable than in the heyday of monetarism. 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% 2003: C/M1 = 50.7%

11. 1960 1970 1980 1990 2000 INCOME VELOCITY OF MONEY “T R E N D” I N V E L O C I T Y Adapted from Brad DeLong’s “Triumph of Monetarism?” Journal of Economic Perspectives, Winter 2000 pre-1980’s trend in velocity actual velocity of M1 Heyday of monetarism

12. 1960 1970 1980 1990 2000 pre-1980’s trend in velocity “T R E N D” I N V E L O C I T Y

13. Federal Reserve Economic Data Gross Saving (private and corporate) in billions of dollars (1994 to present) The D/S ratio measures the extent to which the government is a Big Player in credit markets. Likely movement in the deficit-to-saving ratio: D/S = 35.7%

14. FISCAL STATEGISTS ARE CONFRONTED WITH A SHORT LIST OF BAD OPTIONS BORROW DOMESTICALLY MONETIZE DEBT BORROW ABROAD RAISE TAXES CONTINUE DEBATING High interest rates Inflation (with leverage) Weak export markets Dampened market activity Market uncertainties

15. Gross Federal Debt in billions of dollars (1939 to present) Which way is the government’s debt headed? Federal Reserve Economic Data

16. Anatomy of a Market Meltdown Roger W. Garrison Auburn University