For the last 70 years students of economics have learned about John Maynard Keynes and his idea that when no one is spending money (as in a recession) the government must step in and spend to prime the pump.
After a brief flirtation with Monetarism, Keynes is back as the official economist of the Obama administration and the democratic congress. Many authors and economists have been putting people to sleep with books and economic tracts for generations, but I will have mercy on you dear reader.
Here is why Keynes and his money pump has not and will not work this time. The average recession runs 24 to 30 months, and stimulus a la Keynes works because it piggy backs on the natural cyclical recovery. If Keynesian stimulus is passed 9 months into a recession, it will hit just as recovery begins and politicians congratulate themselves.
Not this time. This recession is different simply because it is more structural, or longer lasting. No one is spending beyond Christmas gifts or for a government subsidized car or house.
If GDP or money supply is $100, and the government expands money supply by $20 to put cash in the system you can see a pending inflation problem, as GDP has expanded 20% to $120 so that people will buy lets say a car.
In this instance it is a one shot benefit for the dealer who sells the car, but likely will not order another one from the factory. If a bank had lent that $20 to a business its customers would have received the $20 and spent it again, and so on. This is velocity of money.
Our problem is there is no velocity of money in the system. Plus the $20 has to be withdrawn from the money supply at some point to fight inflation, so then we are back to $100. No economic growth, no recovery.
Then there is the debt. Uncle Sam is leveraged to the max making further Keynsian pump priming unlikely. Consumers who comprise 70% of economic activity in our new economy are borrowed to the eyeballs as well. They can finance no more, and those that can do not wish to. Hence, no spending. No inventory reorders, no capital equipment purchases, no economic growth except as shown in government statistics.
So where to from here? We will have to innovate and build our way out of this downturn if Uncle Sam will let it happen. If not, say hello to a lost decade (or two) a la Japan.
