Friday, 6 March 2009

Attrition Economics

That's what quantative easing or printing money really is. If the objective, ie beating the enemy, or restoring liquidity in the credit market, is achieved then governments will argue the cost is worth it or if the original objective is not achieved then a revised objective, ie not losing or delaying financial collapse, is adopted to justify the losses.
The repeated interventions by governments in the finance market with our money are like the strategies adopted by the Allies in the early part of the First World War or the Soviet Union in the Second. Governments that have no idea how to win but have to to gain time to delay defeat squander the most easily available resource. Now it is money, then it was soldiers.
Central bankers and finance ministers pretend they know how to cure the problem but so too did the general staffs who planned Verdun, Stalingrad and Dien Bien Phu. Those are all examples of reinforcing stagnant failure. The only thing that one can be certain of is that the world economy will be radically different when recovery happens. However, the methods so far adopted by governments have been rigid and unimaginative - anyone could read an economics textbook and suggest the same "cures". What is needed is flexibility and far-sightedness. If the problems created by the financial industry are indeed to great to be resolved, then a strategy to bypass and quarantine the problems needs to be developed by economists. A good general is not one who wins all his battles but who only fights the battles he must fight to win the war.
My strategy for getting economies out of recession inverts the policies that have been used to precious little effect so far. I accept that consumer demand has been significantly reduced which impacts on the economy upstream. Orthodox economists argue that demand can be increased by making money cheaper and more freely available. I agree, but propose that instead of adding money to the economy to increase demand from the top down it should be done from the bottom up. Give ordinary people more money in their pockets, give them a guarantee that their jobs and homes are safe while the recession lasts and they will spend money, keep businesses going and keep colleagues in work. I call this economic recovery strategy "the teaching kids to ride a bicycle method" whereby one runs alongside with a hand on the saddle helping to keep the bike balanced until, without the child being aware, one lets go and the child has learned to ride the bike without thinking.

No comments: