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: The past was prologue. The present is panic. The future: a conundrum? Banks in every country, along with their industry counterparts, are queuing up for liquidity, capital, or guarantee assistance. “If him, why not me?” Such ‘me-too-ism’ has triggered a cascade of knee-jerk reactions in governments around the world. The US has a bailout a day. The UK and EU follow a day later. The two giants of the future, India and China, are in on the act. The trend is snowballing downhill and we now have a recession.
Fiscal/monetary expansion in Sep-Oct 2008 was aimed at averting financial system collapse. In November, it was redirected at preventing global demand collapse. Extolling the lessons of 1929-39, when the global economy was rescued (paradoxically) by a world war, governments seem willing do anything; no matter how unacceptable in ‘normal’ times (what were those like?) to avert deep, prolonged recession, even a growth recession . Politically and socially, its consequences are unthinkable; especially for administrations (like India’s) at a critical juncture in their electoral cycles.
With gargantuan amounts of cash being pumped out, is there a risk of the world later drowning in a flood of worthless money created by well-intentioned public recession-fighters? Will such profligate largesse defer, or prevent from taking place, the adjustments needed to rectify chronic global imbalances in consumption, savings, investment, and borrowing? Policy-makers might regard such questions as misplaced, churlish, or premature. To them, any voice asking right now whether they know what they are doing or overdoing, is a foolish intrusion that will make this recession and financial crisis worse.
Keynes’ solution of expanding countercyclical fiscal deficits to combat declines in output had a caveat; that, in boom times, governments must generate fiscal surpluses. Since 2000, most governments have been running large deficits in booms; not least in India. They now want to run even larger deficits to mitigate a bust. The logic seems to be that, since irresponsible government spending and borrowing created this mess in the first place, more reckless government spending and borrowing will get us out of it. Such reasoning may seem sensible to economists armed with theory. It is difficult to explicate to laymen armed only with common sense. That may be why economists are held in the regard they are. If experts think that unrestrained money-pumping will work out in the short and long term, they need to explain why. Perhaps...
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