Global Debt: A country-by-country look at spending for growth vs. deficit cutting
A look at the wave of debt crises spreading around the globe.
(Page 6 of 6)
A Fake Recovery
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This is the institutional blog of the Ludwig von Mises Institute and many of its affiliated writers and scholars commenting on economic affairs of the day.
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Most of the measures initiated in response to the crisis, such as the Fed creating a floor for housing prices through its purchase of $1.25 trillion in toxic mortgage-backed securities and agency debt (i.e., Fannie Mae and Freddie Mac bonds), have at best only delayed inevitable corrections. This program is supposed to end in March of this year, and others have already been terminated or are about to be phased out. Several market participants suspect the Fed will extend its mortgage-market support program at the first sign of trouble, though, and Obama is pushing for a new fiscal stimulus. But these measures would just continue to push the readjustment of the economy forward in time, prolonging the economic woes of the country.
Michael Pomerleano, visiting scholar at the Asian Development Bank Institute, makes the case for letting markets correct themselves, when he says that the "nationalisation of private debt injects considerable inefficiency into the economic system, inhibiting Schumpeter's process of Creative Destruction that is essential in a market economy and needed to maintain the private sector."
We have seen this all before. In the 1990s, the Japanese government socialized private losses through a massive transfer of private debt to the national balance sheet. This happened in the wake of the Japanese asset bubble — another boom fuelled by a tidal wave of easy money from the central bank — and led to a decade of slow growth and a lack of restructuring of the economy. Whether or not the US economy is "turning Japanese" is still an open question, but is becoming ever more likely as fake fixes are delaying painful economic adjustments. Christopher Wood made the following observation in the Wall Street Journal:
With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.
As the ominous example of Japan shows us, soaring debt levels (resulting from fiscal stimulus and low growth) and financial forbearance (socializing private losses) is not a recipe for economic success.
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