This article is an excerpt from Chapter 2 of Richard’s new book ‘The End of Growth’, which is set for publication by New Society Publishers in July 2011.
In response to the financial crisis, governments and central banks have undertaken a series of extraordinary, dramatic measures. In this section we will focus primarily on the U.S. (the bailouts of banks, insurance and car companies, and GSEs; the stimulus packages of 2008 and 2009; and actions by, and new powers given to the Federal Reserve), but we will also briefly touch upon some actions by governments and central banks in other nations (principally China and the Eurozone).
For the U.S., actions undertaken by the Federal government and the Federal Reserve bank system have so far resulted in totals of $3 trillion actually spent and $11 trillion committed as guarantees. Some of these actions are discussed below; for a complete tally of the expenditures and commitments, see the online CNN Bailout Tracker.
Bailouts directly funded by the U.S. Department of the Treasury were mostly bundled together under the Troubled Assets Relief Program (TARP), signed into law October 3, 2008, which allowed the Treasury to purchase or insure up to $700 billion worth of “troubled assets.” These were defined as residential or commercial mortgages and “any securities, obligations, or other instruments that are based on or related to such mortgages,” issued on or before March 14, 2008. Essentially, TARP allowed the Federal government to purchase illiquid, difficult-to-value assets (primarily CDOs) from banks and other financial institutions in order to prevent a wave of insolvency from sweeping the financial world. The list of companies receiving TARP funds included the largest, wealthiest, and most powerful firms on Wall Street—Citigroup, Bank of America, AIG, JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley—as well as GMAC, General Motors, and Chrysler.
The program was controversial, with some calling it “lemon socialism” (privatization of profits and socialization of losses). Critics were especially outraged when it became known that executives in the bailed-out companies were continuing to reward themselves with enormous salaries and bonuses. Some instances of fraud were uncovered, as well as the use of substantial amounts of money by participating companies to lobby against financial reforms.
Nevertheless, some of the initial fears about good money being thrown after bad did not appear to be borne out: Much of the TARP outlay was quickly repaid (for example, as of mid-2010, over $169 billion of the $245 billion invested in U.S. banks had been paid back, including $13.7 billion in dividends, interest and other income). Some of the repayment efforts appeared to be motivated by the desire on the part of companies to get out from under onerous restrictions (including restrictions from the Obama Administration on executive pay).
A bailout of Fannie Mae and Freddie Mac was announced in September 2008 in which the federal government, via the Federal Housing Finance Agency, placed the two firms into conservatorship, dismissed the firms’ chief executive officers and boards of directors, and made the Treasury 79.9 percent owners of each GSE. The authority of the U.S. Treasury to continue paying to stabilize Fannie Mae and Freddie Mac is limited only by statutory constraints to Federal government debt. The Fannie-Freddie bailout law increased the national debt ceiling $800 billion, to a total of $ 10.7 trillion, in anticipation of the potential need for government mortgage purchases.
The U.S. market for mortgage-backed securities had collapsed from $1.9 trillion in 2006 to just $50 billion in 2008. Thus the upshot of the Freddie-Fannie bailout was that the Federal government became the U.S. mortgage lender of first and last resort.
Altogether, the bailouts succeeded in preventing an immediate meltdown of the national (and potentially the global) financial system. But they did not significantly alter the culture of Wall Street (i.e., the paying of exorbitant bonuses for the acquisition of inappropriate risk via cutthroat competition that ignores long-term sustainability of companies or economies). And they did not relieve the underlying solvency crisis faced by the banks—they merely papered these problems over temporarily, until the remaining bulk of the “troubled” assets are eventually marked to market (listed on banks’ balance sheets at realistic values). Meanwhile, the U.S. government has taken on the burden of guaranteeing most of the nation’s mortgages, in a market in which residential and commercial real estate values may be set to decline much further than they have already done.
During 2008 and 2009, the U.S. Federal government implemented two stimulus packages, spending a total of nearly $1 trillion.
The first (the Economic Stimulus Act of 2008) consisted of direct tax rebates, mostly distributed at $300 per taxpayer, or $600 per couple filing jointly. The total cost of the bill was projected at $152 billion.
The second, the American Recovery and Reinvestment Act of 2009, or ARRA, was comprised of an enormous array of projects, tax breaks, and programs—everything from $100 million for free school lunch programs to $6 billion for the cleanup of radioactive waste, mostly at nuclear weapons production sites. The total nominal worth of the spending package was $787 billion. A partial list:
- Tax incentives for individuals (e.g., a new payroll tax credit of $400 per worker and $800 per couple in 2009 and 2010). Total: $237 billion.
- Tax incentives for companies (e.g., to extend tax credits for renewable energy production). Total: $51 billion.
- Healthcare (e.g., Medicaid). Total: $155.1 billion.
- Education (primarily, aid to local school districts to prevent layoffs and cutbacks). Total: $100 billion.
- Aid to low-income workers, unemployed, and retirees (including job training). Total: $82.2 billion ($40 billion of this went to provide extended unemployment benefits through Dec. 31, and to increase them).
- Infrastructure Investment. Total: $105.3 billion.
- Transportation. Total $48.1 billion.
- Water, sewage, environment, and public lands. Total: $18 billion.
In addition to these two programs, Congress also appropriated a total of $3 billion for the temporary Car Allowance Rebate System (CARS) program, known colloquially as “Cash for Clunkers,” which provided cash incentives to U.S. residents to trade in their older gas-guzzlers for new, more fuel-efficient vehicles.
The New Deal had cost somewhere between $450 and $500 billion and had increased government’s share of the national economy from 4 percent to 10 percent. ARRA represented a much larger outlay that was spent over a much shorter period, and increased government’s share of the economy from 20 percent to 25 percent.
Given the scope and cost of the two stimulus programs, they were bound to have some effect—though the extent of the effect was debated mostly along political lines. The 2008 stimulus helped increase consumer spending (one study estimated that the stimulus checks increased spending by 3.5 percent). And unemployment undoubtedly rose less in 2009-2010 than it would have done without ARRA.
Whatever the degree of impact of these spending programs, it appeared to be temporary. For example, while “Cash for Clunkers” helped sell almost 700,000 cars and nudged GM and Chrysler out of bankruptcy, once the program expired U.S. car sales languished at their lowest level in 30 years.
At the end of 2010, President Obama and congressional leaders negotiated a compromise package of extended and new tax cuts that, in total, would reduce potential government revenues by an estimated $858 billion. This was, in effect, a third stimulus package.
Critics of the stimulus packages argued that transitory benefits to the economy had been purchased by raising government debt to frightening levels. Proponents of the packages answered that, had government not acted so boldly, an economic crisis might have turned into complete and utter ruin.
Actions by, and new powers of, the Federal Reserve
While the U.S. government stimulus packages were enormous in scale, the actions of the Federal Reserve dwarfed them in terms of dollar amounts committed.
During the past three years, the Fed’s balance sheet has swollen to more than $2 trillion through its buying of bank and government debt. Actual expenditures included $29 billion for the Bear Sterns bailout; $149.7 billion to buy debt from Fannie Mae and Freddie Mac; $775.6 billion to buy mortgage-backed securities, also from Fannie and Freddie; and $109.5 billion to buy hard-to-sell assets (including (MBSs) from banks. However, the Fed committed itself to trillions more in insuring banks against losses, loaning to money market funds, and loaning to banks to purchase commercial paper. Altogether, these outlays and commitments totaled a minimum of $6.4 trillion.
Documents released by the Fed on December 1, 2010 showed that more than $9 trillion in total
had been supplied to Wall Street firms, commercial banks, foreign banks, and corporations, with Citigroup, Morgan Stanley, and Merrill Lynch borrowing sums that cumulatively totaled over $6 trillion. The collateral for these loans was undisclosed but widely thought to be stocks, CDSs, CDOs, and other securities of dubious value.
In one of its most significant and controversial programs, known as “quantitative easing,” the Fed twice expanded its balance sheet substantially, first by buying mortgage-backed securities from banks, then by purchasing outstanding Federal government debt (bonds and Treasury certificates) to support the Treasury debt market and help keep interest rates down on consumer loans. The Fed essentially creates money on the spot for this purpose (though no money is literally “printed”), thus monetizing U.S. government debt.
In addition, the Federal Reserve has created new sub-entities to pursue various new functions:
- Term Auction Facility (which injects cash into the banking system),
- Term Securities Lending Facility (which injects Treasure securities into the banking system),
- Primary Dealer Credit Facility (which enables the Fed to lend directly to “primary dealers,” such as Goldman Sachs and Citigroup, which was previously against Fed policy), and
- Commercial Paper Funding Facility (which makes the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms).
Finally, while remaining the supervisor of 5,000 U.S. bank holding companies and 830 state banks, the Fed has taken on substantial new regulatory powers. Under the Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank law (signed July 21, 2010), the central bank gains the authority to control the lending and risk taking of the largest, most “systemically important” banks, including investment banks Goldman Sachs Group and Morgan Stanley, which became bank holding companies in September 2008. The Fed also gains authority over about 440 thrift holding companies and will regulate “systemically important” nonbank financial firms, including the biggest insurance companies, Warren Buffett’s Berkshire Hathaway Inc., and General Electric Capital Corp. It is also now required to administer stress tests at the biggest banks every year to determine whether they need to set aside more capital. The law prescribes that the largest banks write “living wills,” approved by the Fed, that will make it easier for the government to break them up and sell the pieces if they suffer a Lehman Brothers-style meltdown. The Fed also houses and funds a new federal consumer protection agency (headed, as of September 2010, by Elizabeth Warren), which operates independently.
All of this makes the Federal Reserve a far more powerful actor within the U.S. economy. The justification put forward is that without the Fed’s bold actions the result would have been utter financial catastrophe, and that with its new powers and functions the institution will be better able to prevent future economic crises. Critics say that catastrophe has merely been delayed.
Actions by other nations and central banks
In November 2008 China announced a stimulus package totaling 4 trillion yuan ($586 billion) as an attempt to minimize the impact of the global financial crisis on its domestic economy. In proportion to the size of China’s economy, this was a much larger stimulus package than that of the U.S. Public infrastructure development made up the largest portion, nearly 38 percent, followed by earthquake reconstruction, funding for social welfare plans, rural development, and technology advancement programs. The stimulus program was judged a success, as China’s economy (according to official estimates) continued to expand, though at a slower pace, even as many other nations saw their economies contract.
In December 2009, Japan’s government approved a stimulus package amounting to 7.2 trillion yen ($82 billion), intended to stimulate employment, incentivize energy-efficient products, and support business owners.
Europe also instituted stimulus packages: in November 2008, the European Commission proposed a plan for member nations amounting to 200 billion Euros including incentives to investment, lower interest rates, tax rebates (notably on green technology and eco-friendly cars), and social measures such as increased unemployment benefits. In addition, individual European nations implemented plans ranging in size from .6 percent of GDP (Italy) to 3.7 percent (Spain).
The European Central Bank’s response to sovereign debt crises, primarily affecting Greece and Ireland but likely to spread to Spain and Portugal, has included a comprehensive rescue package (approved May 2010) worth almost a trillion dollars. This was accompanied by requirements to cut deficits in the most heavily indebted countries; the resulting austerity programs led, as already noted, to widespread domestic discontent. Greece received a $100 billion bailout, along with a punishing austerity package, in the spring of 2010, while Ireland got the same treatment in November.
A meeting of central bankers in Basel, Switzerland in September 2010 resulted in an agreement to require banks in the OECD nations to progressively increase their capital reserves starting Jan. 1, 2013. In addition, banks will be required to keep an emergency reserve known as a “conservation buffer” of 2.5 percent. By the end of the decade each bank is expected to have rock-solid reserves amounting to 8.5 percent of its balance sheet. The new rules will strengthen banks against future financial crises, but in the process they will curb lending, making economic recovery more difficult.
What’s the bottom line on all these stimulus and bailout efforts? In the U.S., $12 trillion of total household net worth disappeared in 2008, and there will likely be more losses ahead, largely as a result of continued fall in real estate values though increasingly as a result of job losses as well. The government’s stimulus efforts, totaling less than $1 trillion, cannot hope to make up for this historic evaporation of wealth. While indirect subsidies may temporarily keep home prices from falling further, that just keeps houses less affordable to workers making less income. Meanwhile, the bailouts of banks and shadow banks have been characterized as government throwing money at financial problems it cannot solve, rewarding the very people who created them. Rather than being motivated by the suffering of American homeowners or governments in over their heads, the bailouts of Fannie Mae and Freddie Mac in the U.S., and Greece and Ireland in the E.U. were (according to critics) essentially geared toward securing the investments of the banks and the wealthy bonds holders.
These are perhaps facile criticisms: it is no doubt true that, without the extraordinary measures undertaken by governments and central banks, the crisis that gripped U.S. financial institutions in the fall of 2008 would have deepened and spread, hurling the entire global economy into a Depression surpassing that of the 1930s.
Facile or not, however, the critiques nevertheless contain more than a mote of truth.
The stimulus-bailout efforts of 2008-2009—which in the U.S. cut interest rates from 5 percent to zero, spent up the budget deficit to 10 percent of GDP, and guaranteed $6.4 trillion to shore up the financial system—arguably cannot be repeated. These constituted quite simply the largest commitments of funds in world history, dwarfing the total amounts spent in all the wars of the 20th century in inflation-adjusted terms (for the U.S., the cost of World War II amounted to $3.2 trillion). Not only the U.S., but Japan and the European nations as well have exhausted their arsenals.
But more will be needed as countries, states, counties, and cities near bankruptcy due to declining tax revenues. Meanwhile the U.S. has lost 8.4 million jobs—and if loss of hours worked is considered that adds the equivalent of another 3 million; the nation will need to generate an extra 450,000 jobs each month for three years to get back to pre-crisis levels of employment. The only way these problems can be allayed (not fixed) is through more central bank money creation and government spending.
Austrian-School and post-Keynesian economists have contributed a basic insight to the discussion: Once a credit bubble has inflated, the eventual correction (which entails destruction of credit and assets) is of greater magnitude than government’s ability to spend. The cycle must sooner or later play itself out.
There may be a few more arrows in the quiver of economic policy makers: central bankers could try to drive down the value of domestic currencies to stimulate exports; the Fed could also engage in more quantitative easing. But these measures will sooner or later merely undermine currencies (we will return to this point in Chapter 6).
Further, the way the Fed at first employed quantitative easing in 2009 was minimally productive. In effect, QE1 (as it has been called) amounted to adding about a trillion dollars to banks’ balance sheets, with the assumption that banks would then use this money as a basis for making loans.
The “multiplier effect” (in which banks make loans in amounts many times the size of deposits) should theoretically have resulted in the creation of roughly $9 trillion within the economy. However, this did not happen: because there was reduced demand for loans (companies didn’t want to expand in a recession and families didn’t want to take on more debt), the banks just sat on this extra capital. A better result could arguably have been obtained if the Fed were somehow to have distributed the same amount of money directly to debtors, rather than to banks, because then at least the money would either have circulated to pay for necessities, or helped to reduce the general debt overhang.
In November 2010, the Fed again resorted to quantitative easing (“QE2”). This time, instead of purchasing mortgage securities, thus inflating banks’ balance sheets, the Fed set out to purchase Treasuries–$600 billion worth, in monthly installments lasting through June 2011. While QE1 was essentially about saving the banks, QE2 was about funding Federal government debt interest-free. Because the Federal Reserve rebates its profits (after deducting expenses) to the Treasury, creating money to buy government debt obligations is an effective way of increasing that debt without increasing interest payments. Critics describe this as the government “printing money” and assert that it is highly inflationary; however, given the extremely deflationary context (trillions of dollars’ worth of write-downs in collateral and credit), the Fed would have to “print” far more than it is doing to result in real inflation. Nevertheless, as we will see in Chapter 5 in a discussion of “currency wars,” other nations view this strategy as a way to drive down the dollar so as to decrease the value of foreign-held dollar-denominated debt—in effect forcing them to pay for America’s financial folly.
In any case, the Federal Reserve has effectively become a different institution since the crisis began. It and certain other central banks have taken on most of the financial bailout burden (dealing in trillions rather than mere hundreds of billions of dollars) simply because they have the power to create money with which to guarantee banks against losses and buy government debt. Together, central banks and governments are barely keeping the wheels on society, but their actions come with severe long-term costs and risks. And what they can actually accomplish is most likely limited anyway. Perhaps the situation is best summed up in a comment from a participant at the central bankers’ annual gathering in Jackson Hole, Wyoming in August 2010: “We can’t create growth ourselves, all we can do is create the conditions that make growth possible.”
Deflation or Inflation?
If the bailouts and economic stimuli are effectively just a way of buying time, then there is probably further trouble ahead—but trouble of what sort? Typically, economic crises play out as inflation or deflation. There is considerable controversy among forecasters as to which will ensue. Let’s examine the arguments.
The inflation argument
Many economic observers (especially the hard money advocates) point out that the amount of debt that many governments have taken on cannot realistically be repaid, and that the U.S. government in particular will have great difficulty fulfilling its obligations to an aging citizenry via programs like Social Security, Medicare, and Medicaid. The only way out of the dilemma—and it is a time-tested if dangerous strategy—is to inflate the currency. The risk is that inflation undermines the value of the currency and wipes out savings.
There are many fairly recent historic examples, going back to the very earliest days of money. The Romans generated inflation by debasing their coinage—gradually reducing the precious-metal content until coins were almost entirely made of base metals. With paper money, currency inflation became much easier and more tempting: Germany famously inflated away its onerous World War I reparations burdens during the early 1920s. Between June and December 1922, Germans’ cost of living increased approximately 1,600 percent, and citizens resorted to carrying bundles of banknotes in wheelbarrows merely to purchase daily necessities and even used currency as wallpaper. In the United States, hyperinflation occurred during the Revolutionary War and the Civil War. Hungary inflated its currency at the end of World War II, as did Yugoslavia in the late 1980s just before breakup of the country. During the last decade, Zimbabwe inflated its currency so dramatically that eventually banknotes were being circulated each with a face value of 100 trillion Zimbabwe dollars. The result has always been the same: a complete gutting of savings and an eventual re-valuation of the currency—in effect, re-setting the value of money from scratch.
How does a nation inflate its currency? There are two primary routes: maintaining very low interest rates encourages borrowing (which, with fractional reserve banking, results in the creation of more money); or direct injection by government or central banks of new money into the economy. This in turn can happen via the central bank creating money with which to buy government debt, or by government creating money and distributing it either to financial institutions (so they can make more loans) or directly to citizens.
Those who say we are heading toward hyperinflation argue either that existing bailouts and stimulus actions by governments and central banks are inherently inflationary; or that, as the economy relapses, the Federal Reserve will create fresh money not only to buy government debt, but to purchase stocks and securities and perhaps even to buy real estate directly from homeowners. The addition of all this new money, chasing after a limited pool of goods and services, will inevitably cause the currency to lose value.
The deflation argument
Others say the most likely course for the world economy is toward continued deleveraging by businesses and households, and this ongoing shedding of debt (mostly through defaults and bankruptcies) will exceed either the ability or willingness of governments and central banks to inflate the currency, at least over the near-term (the next few years). Those who see government actions so far as inflationary fail to see that increasing public debt has simply replaced a portion of the amount of private debt that has vanished through deleveraging; total debt has actually declined, even in the face of massive government borrowing.
If a bubble consists of lots of people all at once taking advantage of what looks like a once-in-a-lifetime opportunity to get rich quick, deflation is lots of people all at once doing what appears to be perfectly sensible (under a different set of circumstances)—saving, paying off debts, walking away from underwater homes, and pulling back on borrowing and spending. The net effect of deflation is the destruction of businesses, the layoff of millions of workers, a drop in consumption levels, and consequently further bankruptcies of businesses due to insufficient purchases of overabundant goods and services.
Deflation represents a disappearance of credit and money, so that whatever money remains has increased purchasing power. Once the bubble began to burst back in 2007-2008, say the deflationists, a process of contraction began that inevitably must continue to the point where debt service is manageable and prices for assets such as homes and stocks are compelling based on long-term historical trends.
However, many deflationists tend to agree that the inflationists are probably right in the long run: at some point, perhaps several years from now, some future U.S. administration will resort to truly extraordinary means to avoid defaulting on interest payments on its ballooning debt, as well as to avert social disintegration and restart economic activity. There are several scenarios by which this might happen—including government simply printing money in enormous quantities and distributing it directly to banks or citizens. The net effect would be the same in all cases: a currency collapse.
In general, what we are actually seeing so far is neither dramatic deflation nor hyperinflation. Despite the evaporation of trillions of dollars in wealth during the past four years, and despite government and central bank interventions with a potential nameplate value also running in the trillions of dollars, prices (which most economists regard as the signal of inflation or deflation) have remained fairly stable. That is not to say that the economy is doing well: the ongoing problems of unemployment, declining tax revenues, and business and bank failures are obvious to everyone. Rather, what seems to be happening is that the efforts of the U.S. Federal government and the Federal Reserve have temporarily more or less succeeded in balancing out the otherwise massively deflationary impacts of defaults, bankruptcies, and falling property values. With its new functions, the Fed is acting as the commercial bank of last resort, transferring debt (mostly in the form of MBSs and Treasuries) from the private sector to the public sector. The Fed’s zero-interest-rate policy has given a huge hidden subsidy to banks by allowing them to borrow Fed money for nothing and then lend it to the government at a 3 percent interest rate. But this is still not inflationary, because Federal Reserve is merely picking up the slack left by the collapse of credit in the private sector. In effect, the nation’s government and its central bank are together becoming the lender of last resort and the borrower of last resort—and (via the military) increasingly also both the consumer of last resort and the employer of last resort.
How can the U.S. continue to run up deficits at a sizeable proportion of GDP? If other nations did the same, the result would be currency devaluation and inflation. America can get away with it for now because the dollar is the reserve currency of the world, and so if the dollar entirely failed most or all of the global economy would go down with it. Meanwhile some currency devaluation actually works to America’s advantage by making its exports more attractively priced.
Over the short to medium term, then, the U.S.—and, by extension, most of the rest of the world—appears to have achieved a kind of tentative and painful balance. The means used will prove unsustainable, and in any case this period will be characterized by high unemployment, declining wages, and political unease. While leaders will make every effort to portray this as a gradual return to growth, in fact the economy will be losing ground and will remain fragile, highly vulnerable to upsetting events that could take any of a hundred forms—including international conflict, terrorism, the bankruptcy of a large corporation or megabank, a sovereign debt event (such as a default by one of the European countries now lined up for bailouts), a food crisis, an energy shortage or temporary grid failure, an environmental disaster, a curtailment of government-Fed intervention based on a political shift in the makeup of Congress, or a currency war (again, more on that in Chapter 5).
What should be done to avert further deterioration of the global financial system? Once again, the public debate (such as it is) is dominated by the opposed viewpoints of the Keynesians and the Chicago Schoolers—which are approximately reflected in the positions of the U.S. Democrat and Republican political parties.
The Keynesians still see the world through the lens of the Great Depression. During the 1930s, industrialized countries were in the early stages of their shift from an agrarian coal-based rural economy to an electrified, oil-based, urban economy—a shift that required enormous infrastructure investments (in new highways, airports, dams, and power lines) that would ultimately pay off handsomely for a nation on the verge of realizing a consumer utopia. All that was needed to initiate the building of that infrastructure was credit—grease for the wheels of commerce. Government got those wheels rolling by taking on debt, with private companies increasingly taking up the lead after World War II. The expansion that occurred from the 1950s through 2000, as that infrastructure was built out and put to use, easily justified the government pump-priming that initiated the process. Interest payments on the government debt could be paid through growth of the tax base.
Now is different. As we will see in the next two chapters, both the U.S. and the world as a whole have passed a fundamental crossroads characterized by increasing scarcity of energy and crucial minerals. Because of this, strategies of growth that worked spectacularly well in the mid-to-late 20th century—via various forms of business and technological development—have reached a point of diminishing returns.
Thus the Keynesian spending bridge today leads nowhere.
But stopping its construction now will result in a catastrophic weakening of the entire economy. The backstop provided by government spending and central bank guarantees and debt acquisition is the only thing keeping the system from hurtling into a deflationary spiral. Fiscal conservatives who rail against bigger government and more government debt need to comprehend the alternative—a gaping, yawning economic void. For a mere glimpse of what major government spending cutbacks might look like in the U.S., consider the impacts on European nations that are being subjected to fiscal austerity measures as a corrective for too-rosy expectations of future growth. The picture is bleak: rising poverty, disappearing social services, and general strikes and protests.
Extreme social unrest would be an inevitable result of the gross injustice of requiring a majority of the population to forego promised entitlements and economic relief following the bailout of a small super-wealthy minority on Wall Street. Political opportunists can be counted on to exacerbate that unrest and channel it in ways utterly at odds with society’s long-term best interests. This is a toxic brew with disturbing precedents in recent European history.
If the Keynesian remedy doesn’t cure the ailment but merely extends the suffering (while increasing government debt to truly toxic levels), the medicine of austerity may have such severe side effects that it could kill the patient outright. Both sides—left and right, the socialists and free-marketers—assume and hope to the point of desperation that their prescription will result in a rapid return to continuous economic growth and low unemployment. But as we are about to see, that hope is futile.
There is no “silver bullet,” no magic solution that will turn back the clock to an era of abundant resources and easy growth. For now, all that governments can do is buy time through further deficit spending—ideally, using that time to build infrastructure that will continue to function in the coming era of reduced flows of energy and resources. Meanwhile, we must all find ways to come out from under a burden of debt that will otherwise crush us. The inherent contradiction within this prescription is obvious but unavoidable.
International Business Times, “QE2: More Effective Than QE1,” online blog, November 7, 2010.
Henny Sender, “Spectre of Deflation Kills the Mood at Jackson Hole,” Financial Times,
September 13, 2010.
Image credit: Blow your stimulus photo/New York Times
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