This morning I had a piece in The Australian, “Stop splurge now to avoid going from Gatsby to the Grapes of Wrath”. It argued against those arguing that the current economic malaise seen throughout the developed world is about to abate. An ungated version is here.
With every new injection of credit or
reduction in austerity further government spending, prophets herald an impending end of the downturn. Others, from Krugman to the IMF’s Christine Lagarde, call for yet another round of spending to consolidate the “tentative recovery” they discern.
It’s been like this for six years. Yet, if fiscal infusions have anything but a passing stimulatory effect, like a heroin adict ever greater injections are needed at the expense of future claims on income to eke out even the most modest increases in current income. In the process western governments have amassed debts that were previously unthinkable. These policies have not lifted growth, nor will they. Anything other than transitory growth requires governments to abandon all the Keynesian/monetarist tools of witchcraft taught by mainstream economists.
The harvest from government spending and lending is a hollowed out investment pool. In spite of much capital spending in the period prior to 2007 being unproductive and stimulated by previous loose monetary policies (and including a dollop of wastefully subsidised green schemes), economies have not yet commenced the self-repair of capital spending necessary for sustained growth. Of the 15 largest economies in the OECD, only Canada and Australia, the two most resource-oriented have actually showed by 2012 a share of investment within their GDP’s that exceeds their 2006 levels.
Stock market commentators recognise that the great Quantitative Easing holding up share and bond prices cannot continue forever. Alan Kohler, though, speaks for many in his touching faith in the authorities when he says, “the Fed is basically in control of the market and is unlikely to let it get out of control, as it did in 1994”. His co-Spectator, Stephen Grenville is somewhat less optimistic.
Whether or not disengagement from credit fuelled semi-exuberances on the world bourses takes place smoothly, the fiscal and monetary imbalances remain. Somehow governments have to find a way of reducing their own claims on national income for redistributive purposes and see these shift into productive investment or economies will continue to flatline, or worse.