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blue bits. red rocks.
Tuesday 24 November 2009

The awkward truth about capitalism is the machine does not function unless someone is borrowing money and spending it. The genius of the capitalist system is that it recycles surplus wealth—savings and profits from past economic activity—by lending the wealth for new production and consumption. When nobody in the private economy can borrow and nobody will lend—neither households nor business and finance—government has to step up to the task. In a crisis like this, if the federal government declines to get things moving again by borrowing and spending, as heavily as necessary, then the economy will stumble along far below its potential (that is, higher unemployment, weaker production, more failures). If Obama decides to curtail the deficits now, he is disarming unilaterally. In history, even FDR wanted to have it both ways, but New Dealers learned from painful error they could not serve both masters. In 1936, they decided the recovery was complete so they reduced federal spending and raised interest rates. The depression was resumed with new viciousness. Obama and advisers now seem to think they are out of the ditch and can safely tilt toward fiscal responsibility. The truth is, nobody knows what comes next. Just as plausibly, the trouble is not over but may even get worse. Instead of cresting, unemployment could rise further for another year or more, spreading the suffering and loss more widely. If the “recovery” proves to be an illusion, then another stock market break might follow. Uncertainty is still in the saddle. William Greider

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