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07/04/2020

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While the increase in the FED's balance sheet is troubling, I find the increase in consumer savings to be promising. While spending is still far below 2019 levels, the recovery in some areas has been faster than anticipated.
I read an article on the WSJ (linked below) discussing car sales in the second quarter. While there was a drop over Q2 in 2019, it wasn't as large as many feared. If consumers have confidence (and the funds due to savings, Government stimulus, etc.) to be spending on large purchases like automobiles, I think this is a good sign for consumer confidence and increased spending as the economy continues to open.
The resurgence in COVID-19 cases across many states is likely to result in some rollback of opening measures, which could impact consumer confidence.

https://www.wsj.com/articles/car-sales-fell-in-the-second-quarter-despite-deals-and-covid-19-stimulus-11593621053?mod=searchresults&page=1&pos=19

Christian - thanks. I agree with you. The accumulation of cash balances augurs well for the recovery. A 30% savings rate obviously won't be the new normal, and people will ultimately spend this money. The issue is all one of timing: when will that day come?
Also, just to clarify: while I am amazed by the increase in the size of the FED's balance sheet, I am not troubled by it. There are some long run issues involved (particularly the monetization of the public debt) but these ought not be sources of concerns for the short run.

Professor Wacziarg - thanks for the clarification on the FED's balance sheet. I agree I am more concerned about the long run. While I can't foresee the United States' debt being downgraded in the short term, a climb in debt to GDP as a result of COVID-19 has already started and will likely continue to increase. The US continues to be the safe haven for capital infusions from around the world, but I imagine we will eventually hit a tipping point. Every time the US debt has risen to new levels the "allowable" debt to maintain a level of stability has grown. I would love to hear your perspective on the national debt.

Christian - thanks. A day of recknoning is usually on the horizon when countries accumulate excessive debt. The US has a privileged position due to the special status of the US Dollar as the international currency for transactions and to the perceived creditworthiness of the US government, which makes US Treasuries the world's "safe" asset. That could change, but as long as other countries are accumulating heavy debt loads themselves, I expect US public debt to remain the safe asset if only for comparative reasons. We will discuss debt sustainability in great detail in Module 9 of the class.

Great conversation on government debt. I recently read an article in the Economist and I think you mentioned this as well professor Wacziarg, that the increased debt level is not troubling because rates are so low and the debt service the US pays is not a concern. Additionally, there was some mention of the Euro making inroads in becoming an alternative international currency.

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