Economic Studies Series | “External Shocks,” the Business Cycle and Current Prospects “Sticky-High” Inflation, Policy Errors, and “Financial Disarray”

Posted April 25, 2023 by rvillareal

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The Program today is titled “Where Do We Go? A Compass to Understand the Economy.” Let me start then, with remarks on several questions.

1) Where Are We?—“External Shocks,” the Business Cycle and Prospects for the U.S. and Global Economies; 2) Why and How Did We Get Here? 3) Where Going? 4) Risks—“Financial Crisis” in the Making?

External Shocks and the Business Cycle—COVID-19, “Bust-Boom,” and the Two-Sided Demand- and Supply-Side Inflation Shock

In early 2020 a huge and unforeseen “External Shock,” COVID-19 and a subsequent Pandemic shut down the U.S. economy, bringing unexpected consequences and hugely disruptive effects that still are disrupting the U.S. and Global economies, financial markets and economic prospects—changing the nature of what might have been, and is. Public Health and innovative pharmaceutical and medical responses to the Shock; Unleashed Pentup Demands on Reopenings of the economy; Monetary and Fiscal Policy stimulus; changes in the behavior of households and businesses, financial markets and financial institutions; and disruptions of all kinds that otherwise would not have occurred made for unexpected, unprecedented effects in the U.S. and elsewhere—a big downturn for the U.S. economy, big rebound and big upturn. Ultra-Easy Monetary Policy and Massively Stimulative Fiscal Policy, unwittingly overdone; unleashing of Pentup Demands; and an unexpected Boom after a Bust produced a large and mostly Demand-Pull surge of inflation, “permanent” in nature, and a volatile financial, business and investment climate. The Shock and subsequent Russia/Ukraine War were external to the business cycle, clear and most notable in scope, wide sweep, the illnesses and millions of deaths so tragic in the U.S. and World, perhaps as big as the External Shocks of W.W.II and the 1917-18 smallpox Pandemic.