2008-11-25

Delaying the undelayable

The consensus seems to be that the US Government should continue to spend hundreds of billions of dollars to prop up ailing financial firms, while at the same time prepare for the largest deficit spending on record in the name of economic stimulus.

I can understand the reasoning for this. The idea is that the government help prop up the economy during the current crisis, while taking upon itself a debt burden that will require repayment in the future. In other words, spend now, pay later and borrow now, save later.

Sound familiar? It's precisely this behaviour that has gotten the US in the mess in the first place. Ridiculously low interest rates and irresponsible fiscal practices typified the last eight years of Bush in power, and now we are supposed to sit back and listen to Obama and his current advisers outline their emergency plans without any sort of nagging concern?

The idea of mortgaging the future in order to splurge in the present is a well worn American path that started - let's face it - in the early days of Reagan. Clinton was able to pare back some of the excess by working with congress to pay back government debt, but did little else.

At some point, however, mortgaging the future no longer works because the future suddenly arrives into the present. The current crisis was, in many ways, an inevitability. Did they think that government deficits, trade deficits and current account deficits could be sustained indefinitely? The enormous amounts of debt piled up by the credit market since 1981 was always going to rebalance itself eventually. A day of accounting was always going to arrive - and that day has arrived.

And we think that we can simply postpone it it all, yet again, in the name of emergency spending, bail outs and stimulus? It sounds more like a drug addict's promise that he will get off the drug for good this time... but just one, last, big hit... please?

To be honest, I do not think president-elect Obama and his bevy of advisers would have made any other decision beyond "bail out and spend" in the face of the current crisis. No one wants to raise taxes and be a Hoover. No one wants to ignore standard Keynesian pump priming (deficit spending).

Here in my own country (Australia) the decision has been made to borrow and spend in order to stimulate the economy in the face of the economic crisis. I think it's a good move - but at least here we have had 12 years of fiscal prudence and a net elimination of government debt. Australia has room to move and to use Keynesian pump priming as a way of responding to the crisis. America does not, and neither does the United Kingdom.

I have argued previously that what America needs is a good dose of austerity. Despite the current crisis there is no other, possible way.

The reason why I argue this is simple: we cannot delay any more; we cannot put off the consequences of our actions any longer. And the reason why we cannot is simple - delay is now impossible. We no longer have the choice to put off the inevitable because the inevitable has occurred. The future is here. The chickens have come home to roost and are sitting in their hen houses now. What we have reaped is now being sown.

Any more appropriate metaphors?

The crisis is now. Let's take it bravely. The US government needs to rebalance its finances to ensure a long term financial surplus that will pay off the already massive debt that was accrued BEFORE the crisis began and is now growing steadily larger each time they bail out another financial institution. The Federal Reserve needs to fix monetary policy around price stability, no matter how much inflation is going to result from a collapsed dollar. People's money needs to retain its value throughout the crisis so that, once we reach the other side, they can use it to buy and lend and invest again.

In short, to survive the collapse we must let the collapse occur. It is impossible to put it off any further. Let it crash, let it crash, let it crash...

2 comments:

Noni Mausa said...

I have argued previously that what America needs is a good dose of austerity. Despite the current crisis there is no other, possible way.

Yes, but austerity at the top, not at ground level where people have been stalled for 20 years as far as income increases go, while their obligate costs (housing, health, education, and a couple I can't remember right now) have increased drastically.

The grass roots can't take any more pruning. They need support. It doesn't need to be lavish, universal health care alone will increase their effective prosperity by a good $6 to $12,000 per year. They need stability a lot more than Gatsby does right now -- half of an embarrassment of riches is still riches, but half of "not enough" is disaster.

Noni

Eclipse Now said...

Bailout costs more than Marshall Plan, Louisiana Purchase, moonshot, S&L bailout, Korean War, New Deal, Iraq war, Vietnam war, and NASA's lifetime budget -- *combined*!.
http://tinyurl.com/5nonc4