Another failure of stimulus concept

There have already been at least 4 years of speedy money print (called stimulus) and a constant excessive (high deficit) government spending in an effort to awake the economy of USA, EU and Japan. And the result is… zero… Isn’t it time to stop and think about this? Just a small thinking before the next repeat of the same obviously not working strategy…

Today the unemployment in Spain passed 5 million men that are above 26% of working force. Italy is in political deadlock with economy collapsing. France is in pre-collapse situation. Japan is in a decades long recession. And the leader – USA is in a very weak growth, that is may be only nominal and not real – due to hidden inflation. And all this is despite trillions of stimulus.

There are 2 fundamental mistakes missed by politicians.

The first mistake is the fact that spending money via government is almost the most ineffective way of spending. If you look at the structure of spending you will see most of it as social and welfare expenses, funding the bureaucracy and much other nonproductive targets. The wealth is not created only through spending, but through producing something against this spending. When you just spend and the beneficiary is producing nothing this does not increase the GDP. The government is spending inefficiently. If you want growth you must finance the private sector that will invest in technology, science and marketing to create new products and sell them to new markets. Investing in government is doing exactly the opposite. In fact when the government extracts money from the market this creates a lack in private sector suppressing its development.

The second mistake is the misunderstanding of Keynesian philosophy. This theory is generally doubtful. But there is an un-doubtful scenario when this theory is absolutely guaranteed unusable. This is the case when the economy is extremely opened, i.e. has a large share of import and export in GDP. In this case the pouring of money in economy to create demand, in fact creates demand abroad. I.e. this stimulus can not create jobs and production at home.

Unless USA, EU and Japan understand and accept the neo-protectionism philosophy, it is absolutely useless to spend money on stimulus. This money simply go to China and new developing economies that has an enormous export and accumulate large reserves. I.e. the stimulus money is in Chinese reserves… :)

Continuing this approach will lead to continuing the same reversal results. The real needed reforms are some different. A serious cuts of government spending are needed (exactly the opposite of what is being done now) to free money for the private sector and push more people into real work instead of government doing nothing job. And also some closing of the markets is needed – to bring back real production and factories home. Again almost the opposite that is being done with the chaotic globalization.

Dobri
March 4th 2013

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