Tuesday, June 2, 2009

Countervailing Economic Policy

Quantitative Easing and Keynesian Deficit Government Spending are both theories developed in an environment of low or zero government debt and significant deflation.

The two theories have only been deployed simultaneously one time in a modern political economy: Japan 2001-2006. Japan remains in recession (1989- present).

The Obama Administration is simultaneously deploying Quantitative Easing and Keynesian Government Deficit Spending in an environment of high current government debt, with debt increasing at an increasing rate.

The high debt environment ends up making Qualitative Easing and Keynesian Deficit Government Spending Countervailing Economic Policy with unintended consequences adopting a multiplier effect cascading across the macro economy e.g. dollar devalued, commodity prices increase leading to the specter of inflation, treasuries experience interest rate increases leading to mortgage rate increases, further depressing the housing market, etc. etc..

Meanwhile, since Keynesian Deficit Government Spending supposedly is temporary in nature until Private Capital Formation rebounds.........there is absolutely no economic incentive in the Obama Plan for Private Capital Formation. Hence Private Capital Formation depresses hence leading to a jobless recovery.

Finally, the laundry list of Proposed Tax Increases to finance Government Deficit Spending depresses business and consumer spending becoming yet another countervailing power. The laundry list of tax increases affect so many business sectors and consumers in so many ways that the tax increases also adopt a cascading multiplier effect depressing demand.

The result is Economic Policy know as Chasing Your Tail. Welcome back to the 1970's.

No comments:

Post a Comment