Why stimulus spending is a bad idea

Sadly, stimulus spending as an economic cure may make things even worse than they are.   It probably will not provide the results its promoters want although it will likely lead to a more egalitarian but poorer economy because there is a possibility it would lead to some heavy-duty inflation.

The ideal way to deal with the economic crisis requires  a major change in economic thinking and values starting with the way in which money is created.  Some ideas are in my essay “LETS go to market: dealing with the economic crisis.”  Of course this is not a realistic proposal. Its implementation would require a dictator with a strong and loyal military and this is contrary to my belief that decision-making should be made by individuals.

chovynz_Money_Bag_IconThat leaves austerity or stimulus.

The basic problem is that we have used up a big chunk of the easily accessible resource base.  There may be lots of energy and minerals left in  the surface  of the planet but they are so difficult and expensive to extract we cannot expect continued economic growth.

If this is a correct analysis then austerity will be forced upon us regardless of what we do.  The real challenge is to cope with austerity with a minimum of human suffering.   The problem with austerity as it is being promoted is the selfishness and meanness of those promoting it on the backs of people who are less fortunate.

But what about stimulus?  At least since Keynes, many economists have and continue to believe the way to get economic growth going is via government stimulus.

There is some evidence the depression of the 1930s was made worse because the banking authorities restricted the amount of money in the economy.   Once governments started spending (works and war) and the money supply was allowed to increase the depression came to an end.  This time  central  banks have been trying to stimulate the economy by creating more money to facilitate more economic activity.  It isn’t working  because the resource base won’t support more economic growth  although only a few people see that as the reason.

So what is likely to happen if the Keynesians get a turn at trying to solve the crisis.

There are two difficulties.

The first is that stimulus will be a transfer of purchasing power from those who now have it to others because the debts incurred will eventually be written off either by default or by inflation.  Cyprus isn’t the only country whose savers are likely to be hit.

The puzzle is why with all the quantitative easing and no matching growth in output we haven’t had inflation.  The answer:  there is anecdotal evidence that the banks and corporations are sitting on piles of cash presumably because they don’t  see profit opportunities.

Governments don’t worry about profits so if the money goes instead to governments for stimulus, it will be spent.  There will be more money chasing the same quantities of goods and services and prices are bound to go up.    Inflation provides an indiscriminate haircut to everyone with monetary savings or investments.  If it gets out of control a lot of people will lose their pensions or their fortunes.  It will solve the inequality about which many people have been worrying.  It would also be a neat revenge against those people who want austerity on the backs of poor people although a lot of innocent people would be hurt.

The second problem with stimulus is that if it succeeds in increasing the output of goods and services it will also use up more of the remaining mineral and energy resources and bring forward the timing of a major crash of civilization.  I would like the goal of economic policy to be to minimize overall  human suffering rather than to increase it.

I am not worried about an economic collapse for my own sake, but I do have six young grandchildren.   Perhaps we should post a job opening for a benevolent dictator.

Austerity and more austerity

This week’s The Economist has an article on austerity which has turned out to be worse that some people expected.

I see this article as a part of the debate/conflict over austerity vs stimulus. I also think the economic crisis is a result of our depleting the topsoil and using up the most easily accessible energy and mineral resources.  As the easiest resources are used the costs of additional resources increases and this has to force painful adjustments in the economy.

If this analysis is correct then it is likely a great deal more austerity will be forced upon us regardless of what we do.  Austerity has had a greater negative impact on our economy than a lot of people expected and more and more observers are saying  the economic crisis will continue for some time.

The austerity – stimulus debate will probably continue so long as people believe a return to economic growth is just around the corner.

Limiting our thinking to just these two choices presents  us with  a dilemma.  Stimulus will continue to use up resources and bring forward the timing of a major economic collapse.  Austerity on the other hand is forcing suffering on many people.

Which side a person takes probably depends upon how one is affected by inflation as stimulus generally causes inflation and austerity generally leads to deflation .

Those people who have savings in the financial system are likely to lose some of their purchasing power from inflation and therefore want austerity.  Those people who are borrowers, including governments, are likely to benefit from inflation.  Governments tend to prefer inflation as it reduces their debt load (at the expense of bond holders) but they also have to convince people to continue to loan to them.

The essay “LETS go market: Dealing with the economic crisis”  on this weblog attempts to show how we might deal with the current economic crisis.  Even
so just thinking about the problem leaves me feeling down because I think the outcome will be a few people doing very well and a lot of people experiencing a lot of suffering.

 

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The economic crisis and the Nobel economics prize

Maybe today’s awarding of the Nobel prize in economics adds to my previous post about the economists not dealing with the serious issues.

Match making is a fascinating subject and I frequently ask couples how they met.  I can also accept that match making can go beyond male-female relationships.  I figure economics should be mostly about the relationships involved in the exchange of goods and services.  It appears their work focuses on the initiation of relationships.

However, I fail to see how the work of these two economists is going to help solve the current economic crisis which should be the main interest of most economists.  Probably we need to focus on the types of relationships rather than how people find each other.

Here is a quote from one of many articles reporting on the prize.

“This is very much what economics is about,” said Tore Ellingsen, a Nobel committee member and a professor at the Stockholm School of Economics. “How to allocate scarce resources as well as possible, to economize.”

Why did economists fail us in this crisis?

A number of writers have recently pointed out that economists have failed the people of the world in the current economic crisis in that they failed to predict it and appear unable to offer viable solutions.

Most of these critics, including this one, don’t appreciate the seriousness of the situation and are not themselves radical enough.  Criticizing austerity and promoting stimulus is hardly an economic intellectual revolution as this writer suggests.  Nor is forecasting necessarily the most important part of economics.

As I see it the problem with economics is that the role of economists is not to solve economic problems but to provide theological or moral legitimacy to our economic activity.    Their role is to tell us our economic activity is creating wealth even thought we are really using up scarce resources and destroying the world we value so much.

It could be that most of us are to blame for this economic weakness.  Most of us don’t want to hear that there will be no more economic growth because the implications are extremely painful.

To deal with the crisis the first thing is to recognize that economic growth has come to an end in part because we have used up the most easily accessible resources.  I would also suggest that economics is mostly about the human relationships involved in exchanging goods and services.

If economists are  going to help us cope with current problems they need to study how to cope with negative growth and the type of relationships this will involve.

 

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Dealing with financial greed

Wall Street greed is one of many explanations being offered for the economic crisis.  To the extent that greed is a part of the problem I think it is the greed of most of us that counts.

Most of us have wanted the highest possible returns on our savings and at least as many mechanical and/or electronic toys as our neighbors.  In this respect the 99 per cent are little different from the one percent.

On top of this so many people appear to be ignorant about financial matters and feel they have no option but to trust an expert such as a financial adviser or a bank manager.

Greed plus ignorance makes one the ideal victim for a scam.

Having said all that I would draw your attention to this column from the Washington Post titled “10 inviolable rules for dealing with the sharks on Wall Street”

The column was directed at people with firms or organizations dealing with Wall Street.  But it seems like good advice for any one dealing with the financial industry at any level either as a borrower or a lender.

Understanding the Euro crisis

The key to understanding the crisis in Europe (and around the world) is to go back to the classroom.

When economics professors start their lectures they often draw on the blackboard (or used to) an x-shaped graph with an x and y-axis.  One of the lines represents the real or physical aspect of the economy and the other represents the financial.

This is an important distinction which is mostly forgotten when we leave the classroom.

If we want to understand what is happening in Europe we must look at both sides of the graph.

On the financial side I think the way in which we create money is a Ponzi scheme which collapses from time to time.  We are probably dealing with a financial collapse which is made worse by what is happening in the physical world.

Since the depression of the 1930s the people of this world have used up a lot of resources.  There may be lots of resources left but we have used the most accessible.  What is left will require a lot more energy and work to extract.   This has to have a major impact on the economy.

To deal with the financial crisis we can regroup and continue until the next crisis or we could try to figure out a new way of creating money.

To deal with the resource crisis we may have to reevaluate our commitment to economic growth.

Considering the psychological and political difficulties in changing the way we create money or dropping a commitment to economic growth one starts to think we may be better not to try to understand the crisis.  But that too might pose some problems.

 

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Banking union and rearranging the deck chairs

One of the ways being proposed to deal with the European part of the economic crisis is  centralized banking supervision.  More on that in this article in this week’s Economist.

The question here is would a banking union solve the problem.

Back when Russia was trying central planning and having problems, some people figured the solution was decentralized central planning.  Banking union  sounds like the reverse thinking. It also sounds like rearranging the deck chairs.

If the basic problems is the people or institutions or governments to whom the banks have loaned money are unable to repay those debts then centralization will not work because it will do nothing to reduce or repay the debt.

I think the financial side of the current economic crisis is rooted in the way we create money.  For more on this please see the essay on this  weblog titled “LETS go to market: Dealing with the economic crisis.”

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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