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.