Mr. Global Economy’s delusional mental state

Thursday, August 2, 2012
By Paul Martin

Commentary: Shaky psychology accompanies physical decline

By Satyajit Das
Aug. 2, 2012

SYDNEY (MarketWatch) — Dear Doctor: As requested, I have assessed the psychological condition of Mr. Global Economy, complementing earlier physical examinations.

Mr. Economy appears delusional, believing complete recovery is imminent. Keynesian and Monetarist regimes, he believes, will boost demand and create sufficient inflation to bring his elevated debt levels under control. Read more: Mr. Global Economy’s physical report card.

The Keynesian cure entails government spending financed by taxation or borrowing to restore Mr. Economy’s health. There is no evidence that it can arrest long-term declines in growth.

Government spending boosts activity temporarily, but may create excess capacity in the absence of underlying demand. Nostalgia for President Franklin Roosevelt’s infrastructure projects during the Great Depression is misplaced. Excess electricity generation capacity from dam projects was only absorbed by wartime demand for defense equipment.

Having reduced interest rates to zero, central banks are giving Mr. Economy the Monetarist cure, changing the quantity of money available. They buy government bonds, injecting money into the banking system (QE or quantitative easing) to lower borrowing costs and increase the supply of money to stimulate demand and inflation.

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