By: Larry MacDonald
We are on the eve of an era of massive government deficits in pursuit of a Keynesian-style stimulus to boost jobs and businesses. Do we really need such a humongous jolt?
When Keynes published his prescriptions in The General Theory of Employment, Interest, and Money, there were breadlines around the block, legions of hobos riding the rails, shanty villages on the outskirts of the town, Bennett buggies in dustbowls, and so on. U.S. GDP had fallen by nearly 50%, 10,000 banks had failed with no deposit insurance, the U.S. money supply had shrank by a third, and unemployment had climbed to 25%.
We are nowhere near that point. Massive fiscal stimulus of the kind now in the works should perhaps be held in reserve for when the situation is truly dire. Until then, policymakers would best direct their attention and energies to thawing out the credit freeze. And given the monumental stimulus unfolding in the U.S., China, and elsewhere, Canadians are bound to be lifted into recovery without a domestic stimulus package anyway — just like they were over the past six years.
5 Responses to “ Massive stimulus needed? ”
My view is that the stimulus package will not solve any problem. It is like a band aid and not a solution to any problem.
By Karthikeyan on Jan 27, 2009
I’m a little confused here. $75 billion in the fall of 2008 and then the banks pay dividends was just fine with you. Not too much of a “a humongous jolt” at all. Yet $64 billion over 2 years so there might be a chance I can get working again and you got give it the thumbs down.
http://blog.canadianbusiness.com/bank-stocks/#comment-1950
By Out of Work on Jan 28, 2009
Out of work:
The rate of return on the mortgages exceeds the Government’s cost of borrowing, so they are earning a positive return for taxpayers (yet the initiative has facilitated a reduction in mortgage rates). The fiscal stimulus will add $100 billion in government debt over the next four to five years (while employment rates presently remain above the level that qualified as full employment over much of the past 30 years)
By Larry MacDonald on Jan 28, 2009
Interesting that in a recession we are looking at following Keynesian economics. Yet during the boom, when Keynes said that the Fed should have reduced spending, we spent more and more every year! (http://www.fin.gc.ca/frt-trf/2008/frt08_2-eng.asp#7)
This is not Keynesian economics. When looked at holistically, this appears to be excessive spending.
By the Wealthy Canadian on Jan 28, 2009
Well you got me there. My reasoning, if they didn’t need $75 billion then why did they hand it out (and why did they deem it necessary to increase it form $25 billion). I’m not sure why you think the “monumental stimulus unfolding in the U.S., China, and elsewhere” will pull us up now and at the same time believe we are some how immune to the downward forces.
Below are the first paragraphs from a WSJ article:
“Bankers’ worst nightmare is the unemployment rate climbing toward 10%, a level at which credit losses could balloon unpredictably because of high defaults among people with previously strong credit histories.
Right now, bank balance sheets don’t appear in a position to deal with unemployment moving sharply higher from its current 7.2% rate.” The article is by Peter Evais, Google “Bankers’ Fear of Unemployment” to read the article.
At this time the working class are not in breadlines and the investment class are not jumping out of windows (although there have been a few instances of slit wrists and jumping in front of moving trains by distressed wealthy in Europe), so far so good.
Did you hear this one? Man jumps off a 10 story building. As he pass the 8th floor on his way down a women leaning out the window notices him and shouts in fear “oh my, oh no, thats horrible you must be scared” and the man replies calmly “so far, so good”
By Out of Work on Jan 28, 2009