The economic future is less certain


'Animal spirits' - used more than once in recent times by Reserve Bank governor Glenn Stevens - is the phrase du jour. He wants economic stimulus to unlock animal spirits, to boost the economy. It is not the governor's phrase, in fact, but that of John Maynard Keynes, the creator of supply-side economic theory - and, many argue, monumental government debt.

The Keynes view of life was that if business and consumers stopped spending and investing, then government should step in and fill the breach. But Keynes's nemesis, Austrian economist Friedrich Hayek, argued that governments, like business and households, should live within their means, even if that meant periods of austerity.

What seems clear around the world now is that the Keynesians are winning the economic debate - and that should give you plenty of clues about picking future investment and borrowing strategies.

economic crisis

The first example of why Keynes's supply-side theories are winning out is the US economy, which is in the first phase of recovery after a deep recession because of a massive program to drive down long-term interest rates by buying government bonds (quantitative easing).

After the GFC took hold and banks collapsed in the US, the Federal Reserve bought $US1.75 trillion worth of bonds. Effectively it was borrowing the money to put it back through the banking system. In 2010 it purchased a further $US600 billion worth when the economy threatened to fall back into recession. Then in October 2012 it started a program to buy $US85 billion of bonds each month. That did not end until October last year. By then the Fed had $US4.5 trillion debt on its balance sheet.

That debt is a burden that future generations will have to manage. The bet by the Federal Reserve was that it could stimulate the economy, reduce unemployment and increase taxation revenue for the government. Another consequence of printing so much money was that the US dollar plunged, with the added bonus that it made industry more competitive against imports and boosted the country's export potential.


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