Fighting debt problems by encouraging debt

The usually liberal Fareed Zakaria on the incoherence of the government’s attempts to fix the economy:

Washington is asking consumers to stop saving and start spending, while the government issues more debt and the Fed lowers rates – all measures designed to increase debt. In other words, we are fighting a crisis caused by excessive debt by encouraging excessive debt. Is that really the best way to get growth?

The investment manager and guru Jeremy Grantham says no. In his latest quarterly letter, he points out that over the last generation, American government has created conditions that encouraged everyone to keep accumulating debt. But far from getting a bang, the country’s growth rate actually slowed down over that period. In fact, the effect of all this government-subsidized debt has been deeply destructive. It created asset bubbles in stocks, bonds, commodities and more. One stunning chart in his letter underscores the extent to which the Fed created what he calls “the first housing bubble in history,” meaning the first time that U.S. house prices rose dramatically across the board – and are now falling just as dramatically.

Debt-fueled growth “is, in an important sense, not the real world,” Grantham writes. “In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement.”

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

via Fareed Zakaria – Economic policy needs common sense, not Fed magic, for long-term growth.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • http://www.utah-lutheran.blogspot.com Bror Erickson

    It does seem that the government thinks more debt will somehow get us out of debt, but I’m not seeing it. Doesn’t make sense, unless the endgame is to nuke China which seems to be servicing our debt.

  • http://www.utah-lutheran.blogspot.com Bror Erickson

    It does seem that the government thinks more debt will somehow get us out of debt, but I’m not seeing it. Doesn’t make sense, unless the endgame is to nuke China which seems to be servicing our debt.

  • WebMonk

    One of the big failings of Keynesian economics (and our politicians are only following a half-assed, bits-and-pieces adoption of K ideas which manages to implement many of the downsides and few of the upsides of the framework – K ideas aren’t nearly as stupid as what our politicians are doing), is that it tends to focus very heavily on the consumption of goods as the generator for jobs and growth.

    Savings from citizens can and does provide a MASSIVE source of investment capital which promotes economic growth. It does it a bit less directly than direct consumption, but it avoids the significant problems of focusing so exclusively on increasing consumption as the main/only tool for economic growth.

    For example, an extra 2% savings among consumers would pump in well over a TRILLION dollars per year into the available investment funds made available by banks. ATBE, that would certainly lower interest rates and increase the amount of money available to companies for borrowing and investment.

  • WebMonk

    One of the big failings of Keynesian economics (and our politicians are only following a half-assed, bits-and-pieces adoption of K ideas which manages to implement many of the downsides and few of the upsides of the framework – K ideas aren’t nearly as stupid as what our politicians are doing), is that it tends to focus very heavily on the consumption of goods as the generator for jobs and growth.

    Savings from citizens can and does provide a MASSIVE source of investment capital which promotes economic growth. It does it a bit less directly than direct consumption, but it avoids the significant problems of focusing so exclusively on increasing consumption as the main/only tool for economic growth.

    For example, an extra 2% savings among consumers would pump in well over a TRILLION dollars per year into the available investment funds made available by banks. ATBE, that would certainly lower interest rates and increase the amount of money available to companies for borrowing and investment.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Another big failing I see is that politicians (like too many business executives) have a time preference of “next quarter” or “next year” instead of “ten years out.” Hence they choose to “goose” the economy by stimulating consumption in the short term, not knowing or caring that what they’re really doing is to gut capital investment.

    (and then they wonder why all the capital investment is occurring in China and Thailand….)

  • http://www.bikebubba.blogspot.com Bike Bubba

    Another big failing I see is that politicians (like too many business executives) have a time preference of “next quarter” or “next year” instead of “ten years out.” Hence they choose to “goose” the economy by stimulating consumption in the short term, not knowing or caring that what they’re really doing is to gut capital investment.

    (and then they wonder why all the capital investment is occurring in China and Thailand….)

  • DonS

    The trouble with Zakaria, of course, is that he is very late to this great awakening, yet somehow thinks he’s a genius for figuring it out. And, his more typically liberal solutions are almost entirely on the tax hiking side of the ledger.

  • DonS

    The trouble with Zakaria, of course, is that he is very late to this great awakening, yet somehow thinks he’s a genius for figuring it out. And, his more typically liberal solutions are almost entirely on the tax hiking side of the ledger.

  • Porcell

    Now is the time for all good men to come to the aid of their country.

  • Porcell

    Now is the time for all good men to come to the aid of their country.