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You cannot make an economy grow from the demand side

July 22, 2016

There is an exceptionally insightful article in The Oz today by Maurice Newman titled not very accurately as: Central banks hell-bent on a currency debauch Lenin would love. This is what I think is the crucial point:

Politicians share responsibility for today’s distorted economy, having recklessly spent tomorrow’s productive capital on consumption.

To a modern macroeconomist, all spending drives demand. To anyone with some kind of appreciation of economic cause and effect, wasting our productive efforts on non-value-adding forms of output will leave us with a barren future that will overtake us sooner than you might like to think. It doesn’t have to come in the form of a recession, although it could, but what is certain is that it will become ever more difficult to maintain our living standards even where they are. Our children are unlikely to live as well as we have done, although they will no doubt have a better class of mobile phone. The point Newman makes about the diversion of current expenditures away from productive investment is the single most depressing fact about out present circumstances, and among the last people to understand what is going on are our Prime Minister and his Treasurer.

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