Tuesday, November 25, 2008

Aiding Firms and Industries does not Help Aggregate Demand

The economist within me is very perturbed.

With the massive losses on world stock markets, the solution du jur appears to be to do anything.

Anything must be good but sometimes one must suspect that companies have made wrong decisions on their investments just as countries can make unwise decisions on raising tax revenues and allocating expenditures.

Sometimes, one feels, there must be a day of reaping what you sow, the yan of the yin.

To avoid this, postponing your day of reckoning, and to do "anything," is that really right?

Usually the unsuspecting people who pay for this the most, are the "next generation" or even the unborn if its really that bad.

In Canada, PM's Trudeau and Mulroney through the 70's and 80's had no gumption to spend more than they received, building a national debt that at times took about one third of tax revenues to service, let alone pay down as it was a growing debt.

In the US, hard numbers are buried by multiple offices in charge of that nations budget. Who knows what the Pentagon has spent in the past 10 years and has plans to spend in the next 5 years????

The US appears to be the biggest basket case but it is not alone as it has lead some necessary efforts with free loaders abounding to those efforts. Is China also a basket case, for "hoarding" foreign currency, rather than spending its foreign surplus? Its hoard is more than 1 Trillion US dollars, and to me, the principal failure of Robert Mundell in not turning them into consumers too.

But the point here is that you cannot just create bailout packages for industries if the consumer will not buy what is for sale.

In my small world, the consumer has just about everything they need. The wants department may be lacking as there is always a nicer car, nicer TV, nicer home, but in the make do department, the consumer is satiated.

That is one of the troubles here: consumer satiation in the West.

The other is asset deflation, that comes from excess money supply over a long period of "growth" stimulated by monetary policies that pushed on the strings of the real economy.

With the asset deflation and collapse of home building in the US and collapse of energy production in China, yes PM Harper is right to say that we could have a depression on our hands with high unemployment.

But as I have read today, had the "Conservatives" everywhere (Canada, US, and anywhere else) been harder on energy efficiency and climate change, would we be here today as we are?

I recall Dick Cheney's remark on conservation, paraphrasing: "we don't need conservation. we need more energy production" to be heard as more oil and gas.

Its too late for the what if's.  

Prices are falling on cheap consumer goods, and consumers have their wallets closed, and their credit cards piled up.  

The real assets? There still above the ground, with the best, the cumulating human capital and wealth that is still abundantly present.

Happy New Years to everyone who reads my blogging efforts.  Its been a trying time for me in the last 8 months but as always, here's to the New Year!

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