A market economy in recession, left more or less to itself to adjust to circumstances, will find its way back to growth and full employment within a year, a year and a half at the outside. That same economy, under the administration of managers unsympathetic to the market, may travel in the desert for a very long time before coming good, assuming it comes good. I would like to come back to a post put up yesterday, The Next Phase of Economic Stagnation, which contains the transcript of a debate between a defender of Quantitative Easing in Europe and someone who thinks it is a very bad idea. But what I particularly wanted to comment on was this, stated in defence of QE:
If you’re in a situation where aggregate demand is very weak and that’s a position I think the eurozone is in and you are in danger of slipping into the sort of deflation which I at least and some other judges think is pretty damaging, then this is a mechanism for fending that danger off. And I have to say, I don’t think that there will be much impact from quantitative easing within the Eurozone, apart from through the exchange rate. In driving the exchange rate lower that’s going to help to boost eurozone net exports. It will boost aggregate demand. It will tend to keep up the price level. On balance I think those are pretty good things to be aiming at.
Anyone who invokes aggregate demand as part of an economic argument is wrong. Once universally understood, now universally disregarded, there is no independent force in an economy called aggregate demand. You can shift who gets to do the spending – and in every case where aggregate demand is invoked it is the government that gets to do the extra spending – but you cannot increase the rate of growth or employment. In fact, over time, it weakens an economy’s structure so profoundly that you are frequently worse off than when you began.
Recessions are inevitable, and there are actions a government can take, but increased public spending and higher levels of public debt are not amongst them. The sad part is that economists have so comprehensively invested in this nonsense theory, governments find it perfectly in tune with their basest political desires, and the public cannot understand why it shouldn’t work and like to see more spent on them by government. So here we are, a perfectly constructed downwards spiral based on the latest most up-to-date theories, in which no one can ever quite see the way out again.
It’s been five years of this Keynesian mess with the notion that economies are driven from the demand side. At the start it was direct government spending. As an approach to recovery it has comprehensively failed as no one now denies. So we have now gone to the monetary policy approach with Quantitative Easing, pour money out into the economy and low interest rates will finally lift things up. Also not working but no one knows why. So here’s why, and odd that you have to come to this website to get the only sound economic advice available anywhere. But here is why. Economies are driven forward by increases in value adding supply and by absolutely nothing else. Others can tax, steal or otherwise appropriate the productivity of others and squander what they get. But this will NEVER lead to a recovery, not ever. So we have kept rates low and watched as nothing has happened. Unexpected to others but not to anyone who understands the classical theory of the cycle and Say’s Law.
Anyway, it’s that time of year again. Macro follies continue and no one seems to have learned a thing. And it’s not just consumer spending but all unproductive spending that is a draw down on productivity. Consumer demand is, of course, the reason for bothering with any production at all. But if we are thinking about growth and employment, consumer and government demand has nothing to contribute, nothing whatsoever. Nor does mis-directed investment spending. If you don’t understand why, ask someone to give you a copy of Free Market Economics: an Introduction for the General Reader for Christmas. It’s what I gave everybody last year so why shouldn’t you have a copy yourself?
A note by Karen Maley in the AFR today brings enlightenment following my post on True Confessions yesterday. There she wrote:
Dalio and his team at Bridgewater, the world’s largest and most successful hedge fund, which manages about $150 billion in global investments, argue in a note to clients this week that in the old days, central banks used to cut interest rates to stimulate the economy. But that all changed when interest rates fell to zero per cent. At that point, central banks instead adopted quantitative easing (QE), or printing money and buying financial assets such as bonds. This pushed up the price of financial assets, and central banks hoped those who owned these assets would feel wealthier and would spend more, and this would, in turn, trickle down to stimulate economic activity. [My bolding]
I do not know what to make of this Keynesian dreck any more. If this is the actual dinkum basis for the quantitative easing we have been having, then this is worse than insane, assuming financial suicide is a form of peak insanity.
Spending does not make an economy grow. I’ll say it again. Spending does not make an economy grow. Putting in place real productive assets makes an economy grow. Can you see the difference? Apparently there are folks in powerful positions in every major central bank in the world, and probably in every Treasury as well, that can’t see the difference. But the difference is in having low growth economies that never seem to budge and high growth economies where the largest problem is a shortage of labour.