A Clunker of an Economic Policy

Yesterday, the world was greeted by a much-trumpeted USA GDP report showing 'growth' has returned. Admittedly, the 'growth' was primarily the result of Federal Government stimulus, mainly in the form of the first time house-buyer credit, and the 'cash-for-clunkers' plan. These two giveaways really only pulled consumption forward as opposed to creating new demand. The collapse in auto sales after its programme ended proves the point.

More disturbingly, having the economy increasingly dependent on debt-funded, government stimulus is not a sound policy. Let us illustrate by analogy. Suppose Mr. Miller was down on his luck. Mr. Baker next door has a brilliant idea: "I have an unused credit line down at the Bank. Suppose I max it out and use the funds to buy flour from Mr. Miller. I need to buy flour anyhow. I'll just stock up and then gradually use it up." Mr. Miller is, naturally, delighted when the order for a tonne of flour comes in. He even needs to hire an assistant, Jack, and now Mr. Miller can order that new mill stone he'd been hankering after. GDP is now growing again!

Only here's the fly in the ointment: as Mr. Baker starts buying less flour as he draws down his stock, Mr. Miller's sales are lower than ever! Jack gets laid off and ends up moving into his parents' basement. Jack's former landlord is unable to find a new tenant and starts baking his own bread to economise. Mr Miller also reluctantly cancels the order for the new mill stone. Mr. Mason, faced with no prospects of further business, sells his home and joins a monastery. Mr. Baker is faced with falling sales, and now a hefty interest payment on that line of credit. GDP is falling again, and even worse than before!

A debt-binge set up the world economy for the 2007 Depression. The attempt to keep the debt party going will end in tears. Mark our words! [cue spooky music]