And here comes another world improver, Larry Summers.
“What is to be done,” he asks.
The question reveals the conceit. Why is it any of his business? Left alone, people generally get what they have coming – at least in the world of economics. Why not give markets a chance?
Ah…but then Mr. World Improver would not be such a very big shot, would he?
What if Mr. Summers could only throw his weight around in his own home…in his own businesses…at his own club? Imagine how lucky his family would be, with all that problem-solving brainpower focused on such a small enterprise.
Instead, his fixit energies are dispersed all over the world. Solve China’s problems one day…Japan’s the next…and America’s the day after. So what if it’s Saturday? There’s work to be done!
So, instead of minding his own business, Mr. Summers has come to the aid of a world suffering from a Japan-like slump.
“The question is not whether the current policy path is acceptable. The question is what should be done?” he asks again in the same article.
“Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.”
Hey…spend more…buy more stuff. Then, people will want to lend you more money!
How does that work, again? Well, the idea is an old one. You spend more money…the economy gets revved up…and you pay off your debts out of the greater flow of revenue. Perhaps Mr. Summers hasn’t noticed. But that formula has worked less and less well ever since WWII. This time the feds borrowed and spent more than ever before…and they got the weakest, palest, saddest excuse for a recovery on record.
Mr. Summers is right about one thing. When some fool is willing to lend you money at negative real interest rates, you should generally take it. Dear Readers will recognize this as essentially Japan’s strategy for the last 2 decades. The lumps want to lend you money. They don’t want anything in return. So you take their money.
You can use it to build roads, sports facilities…any damned thing you want. Are they worth the resources? Who’s to know? Government improvement projects are never marked to market.
“It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero,” writes Summers.
But how could you tell? Maybe if you put in a toll bridge, or something like that. Otherwise, you’d never find out…and our strong hunch is that the net return on these government “investments” would be well below zero.
The Japan solution…which is also Mr. Summers’…is a solution to a non-problem. A Great Correction brings a lack of demand, as consumers and businesses cut back spending. The lack of demand lowers prices…which makes assets attractive, labor affordable and investment projects profitable again. That’s how a correction works. Without a lack of demand you can have no correction.
But the meddlers think they have to make up for a lack of real demand by substituting an ersatz demand from government. The result? Ersatz “growth.” You get an economy that seems to be functioning more or less well, but which is really digging a deeper hole for itself. Government debt increases…while real production is pushed aside in favor of boondoggles, bailouts and bunkum.
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From the Archives…
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When the Pain From Spain Moves Across the Plain
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Greek Game Theory: Default, Devaluation, Austerity, Deliverance?
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Desperate Stock Market Traders Waiting To Be Made Whole
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Greek Elections: The Fear of Uncertainty
2012-04-28 – Dan Denning