Another clueless commentator offering Voodoo economics

Market Fundamentalism strikes again. “The Daily Capitalist” on ZeroHedge has given us a recipe for recovery. It’s actually a recipe for disaster..
People can write all sorts of nonsense in order to blame everything on the Government (funny enough, it’s usually this government, not the previous one) and the Fed. Invariably, these kind of writings work backwards from a textbook model of an economy consisting of perfectly functioning markets that always clear.

You can read all the funny stuff here, we’ll limit ourselves to some comments.

1) The four points of his “analysis”:

There are many problems seen as hindering recovery. Here are the common ones I wish to examine:

  1. Too much debt encumbering consumers;
  2. The lack of consumer demand to fuel growth;
  3. Too much debt encumbering banks; and
  4. The government’s interference in the economy.

2) Savings are good!

But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity. While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.

This is just Say’s law all over again, savings automatically translate into investment to always keep the economy in full employment. After reading this, we already know where this is heading (see here for the nonsense of Say’s law). Some questions:

  1. Why would companies borrow to expand business when demand is not there and capacity utilization is already so low and with rock bottom interest rates?
  2. Why wouldn’t they borrow even at these record low interest rates? Let the government get out of the way (as the article strongly urges later) and interest rates would be a lot higher, but that would supposedly revive credit demand?
  3. So, isn’t it much more likely that credit demand is low, rather than credit supply?
  4. Would they start to borrow more with higher interest rates and even less consumer demand? Why

3) It’s all the Fed/Government’s fault

I have explained in great detail why banks aren’t lending in previous articles (e.g., Will We Have Inflation, Deflation, or Hyperinflation?). That is, they made a ton of bad loans as the result of cheap Fed money

Uhh, really? So it’s got absolutely nothing to do with widespread malfunction in loosely regulated financial markets, despite a wealth of evidence

4) Stimulus spending is by definition artificial..

Artificially stimulating spending is counter-productive to a recovery since such economic activity is not based on organic, market based consumer demand. In other words, since the spending is not being generated by increased business activity caused by consumer demand, no lasting economic activity is produced.

Huh? How’s that?

Public spending is not real spending? What about, say, teachers salaries? Does that not create a product (actually, one with very large long-term returns, as it happens) for which there is a demand? Don’t those teacher salaries create more demand by being spend on goods and services? Isn’t that the multiplier effect this guy is deriding?

5) No role for the government, the market economy is perfect.

There is only one thing that the government can do to create jobs: get out of the way of businesses and entrepreneurs who create them.

Uhhm, that’s what was tried in the 1930s. Market economies are wonderful systems, but they’re not perfect, there really is a wealth of evidence (both theoretical, and practical). Perhaps our “Daily Capitalist” should read some of that stuff..

But perhaps we should look at countries without functioning governments..

6) Has “The Daily Capitalist” ever heard about balance sheet recessions, deflationary debt spirals?

We could go on and on (it’s not worth it, really) but this is exactly the type of market fundamentalism that the former head economist Simon Johnson blames for the financial crisis..