The basic outcomes from the monetary and fiscal policy are easily determined.
On the one hand we have a zero bound being held by the Fed. On the other we have increasing amounts of long term debt being placed in the market. The result currently is a steep yield curve which will not hold.
How does the yield cure correct? Long term rates must go down as we hold zero bound or short term rates have to rise. The former solution implies a long term reduction in GDP. The later has to possible mechanisms. One, the Fed cannot hold zero until a dollar crash, so it raises rates suddenly and kicks in the double dip. Or two, Congress greatly reduces the deficit. Congress can reduce the deficit if onnovation solves the economic constraints, or Congress can reduce the deficit by reducing government services to coincide with a reduced output trend.
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