Faced with bailout or collapse, should US choose collapse?
Stocks were flat yesterday. Gold fell $3.
The news was mixed.
The big debate is between those who think the authorities are being too tight and those who think they are being too loose. Broadly, Europeans are on one side. Americans are on the other. The Europeans are tightening up. The Americans are letting rip. They鈥檙e both wrong, as far as we鈥檙e concerned.
It鈥檚 all nonsense. Just goes to prove our dictum that people come to think what they must think when they must think it. The Euro-feds can鈥檛 afford to think they can loosen up. Their lenders have already laid down the law: 鈥楰eep spending like the Greeks and we鈥檒l hit you with Greek-style interest rates.鈥�
Just a few weeks ago the Greeks were forced to pay 16% interest. At that rate, borrowing is out of the question. You鈥檙e effectively cut off. Because the more you borrow, the higher your interest rate. Soon, you run out of money.
As Nouriel Roubini put it, 鈥榓usterity is not optional.鈥� Since it鈥檚 not an option, but a necessity, there鈥檚 no point in thinking anything else. You might like to spend more money, but you know you can鈥檛 get away with it.
The US doesn鈥檛 have to think about austerity. Not yet, at any rate. They鈥檝e got the whole world ready to lend them money. 鈥楬ere, take a drink of rice wine,鈥� say the Chinese. 鈥楬ere is some champagne,鈥� say the Europeans. 鈥楢nd here鈥檚 a bottle of whiskey,鈥� say the jokers in the back of the room.
It is only a matter of time before Americans fall down.
Not so, say the Keynesians 鈥� led by Paul Krugman and Martin Wolf. They say it鈥檚 just a matter of managing the situation. Enjoy the party. You can pull yourself together later.
鈥淭he best policy is to put together measures that sustain strong growth in demand in the short run,鈥� writes Wolf in yesterday鈥檚 Financial Times, 鈥渨hile constraining the huge deficits in the long run. It鈥檚 like walking and chewing gum at the same time. Why should that be so hard?鈥�
Meanwhile, Richard Koo probably knows more about this sort of economy than anyone. He鈥檚 lived with it in Japan for the last 20 years. So, what does Koo think?
He says you can forget about a quick recovery. Japan has been hoping for a quick recovery for the last 20 years. It鈥檚 been following the Krugman-Wolf approach 鈥� stimulating demand with fiscal policy. That is, it spends more than it collects in taxes, counting on the extra government spending to light a fire under the private sector.
But that won鈥檛 happen, says Koo. The private sector won鈥檛 start spending again until it has finished de-leveraging. Paying off debts takes a long time 鈥� especially when the government keeps bailing you out. So prepare for a long slump in the private sector economy.
So far, so good. But then Koo takes the classic Keynesian line. Like Krugman and Wolf, he believes the government should replace private spending with spending of its own.
It sounds logical enough. At least if you don鈥檛 think about it too much. An economy is the sum of spending and investing. If the private sector goes into a funk and stops spending and investing, the economy shrinks. So why shouldn鈥檛 the government step in and help out a bit?
Koo thinks so. Krugman, who won a Nobel Prize in economics, thinks so. Wolf, who heads up the worlds鈥� most influential financial journal, thinks so.
Well, count on us, dear reader. We don鈥檛 think so.
A real economy is much too complex for such simpleminded management. It is an organic system that delivers to people what they want (markets give them what they deserve). An economy doesn鈥檛 necessarily correspond to what academic economists think it should be鈥r necessarily do what they think it ought to do鈥r sit still long enough so they can tell what the hell it is doing.
A real economy has a mind of its own. It doesn鈥檛 care about their GDP growth rates. Whether people lose their jobs or not is not its problem. And it certainly doesn鈥檛 intend to help politicians get re-elected.
Sometimes people want to spend. Sometimes they want to save. Keynes identified this 鈥減ropensity to save,鈥� as though it were an unpardonable sin. If the people won鈥檛 spend, we鈥檒l spend for them, he said鈥r words to that effect. But why shouldn鈥檛 people be allowed to save money rather than spend it?
鈥楤ecause the economy might collapse,鈥� says the Krugman-Wolf-Koo crowd.
鈥楽o what?鈥� answers The Daily Reckoning.
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