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National Insolvency As Policy Response To Economic Crisis?

January 11th, 2009 Comments off

A global panic by policy makers has been in overdrive since the initial financial crisis brought the world’s credit markets to the brink of total meltdown. Staggering sums of money that boggle the human imagination are being heaved at the global crisis. With a fully-fledged global economic crisis now underway, the spigot of debt-driven cash is flowing out of governments like Niagara Falls. The most conspicuous example is the Obama stimulus package, now in preparation for rapid passage once the 44th U.S. President is sworn in. The planned American stimulus package alone may top one trillion dollars over two years. This comes on top of the $700 billion TARP program of Hank Paulson infamy, now conceded by many economists to have been a poorly conceived boondoggle.

The global public square is being told that this massive amount of money must be spent, or the world economy will fall into even worse distress. Conveniently being veiled is the inconvenient fact that these monstrously large expenditures must be made with borrowed money, as many nations, especially the United States, have treasuries that have long been laid bare by accumulated deficit spending.

Even economists who are convinced that huge amounts of deficit spending must be tolerated to salvage the global economy are aware that the “medicine” may be the harbinger of its own financial disease. Consider what Nouriel Roubini, the “prophet of doom,” told BusinessWeek in a recent interview about the U.S. stimulus spending:

“…the cost of issuing a huge amount of public debt will be trillion-dollar budget deficits this year and next, which eventually is going to have a crowding-out effect on private demand. So either we issue a huge amount of public debt to finance it, and that’s going to push up interest rates, or we print a lot of money that eventually is going to be inflationary and again damaging to the economy. We have no choice but to have an aggressive policy response, but it’s not a free lunch.”

Not a free lunch, states Roubini, a reality that policymakers are hiding from their publics. These, the very same mediocre political leaders who facilitated the global economic crisis, surrendering to the “logic” of the unregulated market place. What does “no free lunch” mean?

The United States is currently broke, from a fiscal standpoint. The trillions of dollars in excess expenditures being planned by the policy makers will inevitably require massive borrowing, at a time when foreign countries whose credit markets the American authorities depend on will be doing their own stimulus deficit spending. The only way the U.S. will be able to attract foreign credit in this context is through much higher interest rates. This will kill private borrowing, stifling investment and ultimately defeating the purpose of the stimulus spending. The other alternative is to simply print the money, and produce the hyper-inflationary hell that now exists in Zimbabwe.

Virtually every serious economist agrees that massive deficit spending in the United States by both the public and private sector was the driver of the global economic crisis. Strange that the identical prescription that led to this disaster is now being advertised as the cure.