|Debt Has Grown Faster Than GDP|
Before the crisis, most economists thought the amount of output of goods and services was primarily driven by supply, Yellen said. “This conclusion deserves to be reconsidered in light of the failures of the level of economic activity to return to its prerecession trend in most advanced economies.” This line of reasoning is consistent with the Fed and the actions of central banks across the world. For years they have fomented policies to increase demand oblivious to the harm they were doing to the ability of markets to self-correct. Low-interest rates have punished savers, distorted markets, and caused capital to be allocated in nonproductive ways.
Blanchard indicated a chief reason the economy is not growing faster is that over the past few years several revisions lowering potential growth have created a situation where both people and firms have arrived at a point that they say “well, why should we invest a lot, why should we consume a lot?” This translates into linking our weak recovery to the anticipation of a mediocre future. Blanchard paints the somewhat patronizing picture that ordinary people and firms have no clue about potential growth but weakness does affect their decisions and tends to hold back demand.. This means reduced investment by business and consumers buying less and saving reinforcing the cycle of slow growth. Like many politicians, Blanchard points to increasing public investment and spending on infrastructure as a way forward. Sadly this type of spending often leads to building bridges to nowhere and costly boondoggles.
|Historically Low Rates Create New Problems|
In the past, I have expressed concerns about the games being played with currencies and speculated how the failure of any of the four currencies that currently make up the bulk of world reserves would be very destabilizing. As long as the central banks behind these currencies move in the same direction and march in lockstep the integrity of this rather closed system may be able to remain intact. Still, worries exist as to just how much ammunition remains in the arsenals of the central banks and I find very troubling the argument that conditions remain too fragile to begin a return to historic norms. Also, questions remain as to whether the world can handle additional government debt when rates begin to rise. As the world economy matures creating an economic foundation that is balanced and sustainable over the long term is of major importance.
Footnote; The limks below are related to subjects mentioned above.