Monetary and fiscal space will be very limited in the next US downturn

Editor's note: This post was first published on Patreon on 27 June 2018.

The United States governments spends money by keystroke. And though it is forced by law to sell bonds when its accounts at the Fed run low, this artificial constraint is easy to overcome. Quantitative easing alone -- where the Fed buys US Treasuries via money it creates with keystrokes -- tells you that. There is no limit to the number of dollars the US government can create.

Yet, when I look at where things are headed in the next downturn, I see very little policy space. Let me tell you why below.
Limited monetary space
The monetary side of this is easiest to explain. Rates have eased by an average of 6% over the past five business cycles. As I explained in March:

In July 1981, federal funds went from 19...

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