What does modern economics really do? Lengthen recessions.
Why don鈥檛 people borrow?
Because it鈥檚 not a liquidity problem. It鈥檚 a debt problem. A solvency problem. And it won鈥檛 go away by making more cash and credit available. Instead, all those bad decisions, bad loans, and bad investments have to be cleaned up. And that takes time. And while the economy is de-leveraging, people are becoming more cautious鈥ore risk-averse鈥ore modest in their expectations.
What do Rogoff and Reinhart say about governments鈥� efforts to fix these problems? What does history show?
They say the feds often make the situation worse.
Not only do governments typically pour bad money after good, they also disrupt the process of correction. Insolvent banks are kept alive. Big businesses that ought to go broke and be sold off are instead propped up鈥he lights are kept on by government subsidies, preventing new competitors from occupying the space. Consumers and investors keep waiting for the promised 鈥渞ecovery鈥濃�or the cure鈥or the fix. Instead of quickly adjusting to the new circumstances, they delay鈥hey hesitate鈥hey postpone unpleasant changes.
They might quickly sell a house at a loss, for example. They could then go on with their lives. But when they hear the feds tell them they have a new program in the works鈥r a new stimulus bill in Congress鈥r new action by the Fed鈥hat are they supposed to think?
鈥淢aybe I should wait and see if this new effort does the trick鈥︹�� they say to themselves. 鈥淚鈥檒l feel like a real fool if I sell now and then the feds get a new bull market going.鈥� 鈥淢aybe I should wait before accepting a job at a lower salary; it says in the paper that the economy should recover by summer鈥︹��
The economic setbacks of the 19th century were sharp, but fairly short, affairs. The contribution of modern economics has been to stretch them out and make them worse.
How about China? Won鈥檛 growth in China and the other BRICs lead the whole world out of its funk?
We wouldn鈥檛 count on it.
First, the Chinese economy has been growing at near double-digit rates for the last ten years. It didn鈥檛 stop the crisis and so far it hasn鈥檛 helped the developed nations 鈥� at least the US 鈥� get out of it.
More important, China is probably getting itself into a big mess too. All we know is what we read in the paper on the subject. But what we read is that the spectacular growth China has enjoyed so far was made possible by freeing the private sector. But now the Chinese government is muscling the entrepreneurs out of the way.
鈥淣ow鈥t is state-run Chinese companies that are on the march,鈥� says The New York Times.
Railroads, mining, airlines, manufacturing, hotels, yogurt鈥� The Chinese government either owns it, controls it, or invests in it.
And if you think private investors make mistakes, you should see what the government does!
A Daily Reckoning dictum: people make mistakes all the time; but if you want to make a real mess of things, you need taxpayer support.
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