A sensible analysis

This analysis of the current world economic situation by Martin Wolf seems sensible to me:

The world economy has no easy way out of the mire

As long as private savings remains high on a global level, and profitable private investment opportunities are limited by stagnant aggregate private demand, the global economy is going to be weak. Here are some possibilities I see:
  • Governments can borrow the excess private savings and invest it in stuff that will help generate new opportunities for private profit further down the road. Downside of this is that it increases the government's long term interest expense burden.
  • Government repeats the World War II solution: Use deficit spending to buy a lot of stuff, then blow it up and in the process also destroy a large part of the world's infrastructure, thereby creating demand to replace all the blown-up stuff.
  • Variation on the above: Instead of blowing up infrastructure to create demand to replace it, make existing infrastructure obsolete via regulation, creating demand to replace it. To kill two birds with one stone, target infrastructure that is bound to become obsolete anyways in the medium term (i.e. infrastructure that assume cheap oil, for one example).
  • Governments take from the rich (who are saving too much) and give to the poor (who will spend every penny) to eliminate the high private savings rate. Presumably through higher taxes on the upper income brackets.
  • Variation on the above: Governments figure out some way to shift income from developed countries to developing countries and get them to spend it.
  • Governments can simply print money and spend it (i.e. no borrowing to finance new deficits) to eliminate the gap between demand and income without increasing the long term interest expense burden on governments. I know people think this will lead to inflation, but as long as aggregate demand more or less matches aggregate productive capacity I don't see why it should. When and if the private sector stops saving and starts living paycheck to paycheck again the government can simply stop printing money and/or increase taxes or interest rates to keep demand balanced with productive capacity.

1 comment:

  1. Hi, Andy. Good blog-name! I looked things over. I like your relaxed, evaluative approach to economic issues. I don't have any specific comments on any of your topics. But I'll be around.