A Most Dangerous Inflection Point 13 comments
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“If we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment.”
President-elect Barack Obama
January 3, 2009
There is a major economic battle underway pitting the resurgent Keynesian forces of President-elect Franklin Delano Obama against the monetarists and the remnants of the laissez faire/supply side crowd. To exemplify this policy struggle, consider the following two recent quotes from Paul Krugman:
“The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.”
“(Milton) Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time.”
To help complete the picture of this economic/political battle royal we have the factions of the newly empowered Democratic Party and its liberal wing seeking to spend the political capital they think they have earned courtesy the recent election results. Then, on top of all this is the stickiness of Washington business as usual and the reality that entrenched power is rarely ceded without a fight.
Needless to say, the task before Mr. Obama is daunting. And we will all learn if his campaigning skills can be translated into effective policy decisions and leadership.
Investment Strategy Implications
The central question is not whether all the money being thrown at the global economy (both fiscal and monetary) will produce positive results. It will. Rather, the key question is whether the policy actions under vigorous (and potentially divisive) debate involving trillions of dollars ends up stabilizing and then turning things around or merely mutes the decline to an era of lessened living standards and a lower quality of life. If the former, a new era of growth ensues. If the latter, get ready for the Great Depression II and a highly dangerous future.
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This article has 13 comments:
I agree, and suspect almost everyone will agree, that it has to produce "positive" results when measured in NOMINAL terms, i.e. in nominal units of deflated currencies, dollars, euros, etc. The real question should be whether it produces POSITIVE results in REAL terms, after adjusting for inflation, and that is where people may differ. I suspect it won't.
It is likely the package will comprise comprise tax cuts for households, relief for state and local governments and infrastructure spending. Republican favor tax relief while the democrats embrace infrastructure spending.
If history is any guide, the final outcome will be a product of compromise.....which by definition is at odds with terms such as spending efficiency and maximizing return on public spending.
The problem is that politicians don't make economic decisions, they make political decisions with economic consequences. It will end well only if we are really, really lucky.
In retrospect, the reader may realize that it might not be such a bad idea to bring down the current high standard of living.
In my view a lower level would promote more carefree lifestyle (less that catching up with the Jones), more domestic real productive industrial investment (because labor cost is lower and thus more attractive to the Capitalist not to outsourcing overseas). Clearly a continuing upward spiral of living standard that was spearheaded by financial leveraging in the past decade proved to be calamitous and unsustainable.
And I dispute the author conjecture that it would bring a "lower quality of life". Quite the contrary I believe a higher quality would ensue. Traffic jam, pollution, excessive immigration, college tuition that rises faster than inflation and even funeral costs, would be reduced or kept at bay.
Indeed, the planet earth, with both pole's ice caps melting, needs a breathing space.
On Jan 09 09:35 AM ChipSeal wrote:
> Any recovery is doomed to a long agonizing protracted incremental
> rise because of the crushing debt burden now being deployed. The
> best case scenario, due to federal policy, is awful. Perhaps GD-II
> will be so bad we can put away forever these pernicious Keynesian
> ideas.
>
> The problem is that politicians don't make economic decisions, they
> make political decisions with economic consequences. It will end
> well only if we are really, really lucky.
I meant to say: "Politicians made mistakes, they (the Politicians) called it "political mistakes", but then it is always the people who suffer as a result of those mistakes.
On Jan 09 10:40 AM Teutonic Knight wrote:
> Politicians made mistakes, and the people suffer...
Screw tax cuts, go for the juggler. Let's build some bridges.
Secmaven got a thumbs up from me.
RJ, keep your fingers crossed. Ah, we'll make it, but not without some losses.