Posted by: CS | August 4, 2011

Mish’s Three Cardinal Rules of Stimulus: All Wrong

Michael Shedlock’s Global Economic Trends Analysis provides an enjoyably philistine deconstruction of the received economic wisdom, and is often correct.

But, under the heading: Keynesian Clowns Argue For More Stimulus, Mish offers these Cardinal Rules of Stimulus:

  1. First rule of stimulus: It always runs out.
  2. Second Rule of stimulus: All it can do is create a greater pile of debt.
  3. Third rule of stimulus: Spend enough money and interest on debt will eventually consume you.

all of which are wrong.

First, stimulus need not run out provided that the government is able to print its own money (as the US can, but Greece, Italy and Spain cannot) and does not run out of paper and ink or, since this the electronic age, digits.

Second, stimulus need not create debt, provided the government resorts to money printing, aka quantitative easing, rather than borrowing (technically, money printing gives rise to a debt on the books of the Federal Reserve, but the interest paid by the Treasury on that debt is refunded to the Treasury, less expenses).

Third, provided government borrowing is accompanied by sufficient money printing, the value of any debts incurred as a result of stimulus spending will be inflated away at a rate at least equal to the interest rate.

So yes, the US can go on stimulating as long as it wants. Yes, if it does so, it will destroy the savings of those who hold dollars and dollar-denominated debt instruments. But it can go on indefinitely, until the price of a loaf of bread is specified in rail cars full of dollar bills.

Ideally, the stimulus spending should go to projects that yield a return on investment. That way, idle assets, including workers, are made productive in ways that expand the real output of the economy, thus nullifying the inflationary effects of stimulus spending. Unfortunately, so far, the money has mostly gone to swindling banksters and unproductive bureaucratic activities.

Sadly, the US Government seems devoid of ideas for investment in human capital and infrastructure that could radically enhance the future productivity of the nation. Obama could surely earn credit by announcing a national competition for new stimulus ideas, with  multi-million-dollar prizes for the best productivity-boosting proposals.

But in any case, expect stimulus spending and quantitative easing to continue intermittently: not enough to restore full employment, just enough to stave off revolution. The aim is for gradual dollar devaluation, inflation and a reduction in real wages leading to wage convergence between the US and the developing world.

See also:
Why economics is bunk and what that means for the economy
America’s inflationary depression
USA versus China: Wage Convergence, Wealth Divergence and Global Hegemony
US Economy: Expecting the Unexpected
USA Boom or Bust: The Next Decade
Why China Booms While America Slumps
China’s Economy Already Larger Than America’s

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Responses

  1. Interesting article of the 3 cardinal rules. We need to find a way where the cost of Wall Street/The City's bailouts are met by rich investors/bondholders in these institutions (who should be shouldering the risk under the rules of freemarket capitalism)and not the taxpayer of Main Street.

  2. "We need to find a way where the cost of Wall Street/The City's bailouts are met by rich investors/bondholders in these institutions (who should be shouldering the risk under the rules of freemarket capitalism)"Yes, what is "too big to fail" should broken up. Then those that failed could be left to fail at their own expense. A further advantage is that there'd be more "freemarket," i.e., competition, in capitalism.Unfortunately, the trend is all the other way.


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