FinancialGuy Writes!

If a problem involves too much borrowed money, since when is ‘borrowing more’ the answer?

Posted by financialguy on 04/12/08

Whilst all these ‘stimulus plans’ may have the best of intentions and be the most plausable idea to help the economy so far, exactly who are we ‘bailing out’ and ‘stimulating’?

At the core of this issue is one simple question: Since when did borrowing more money become the way to solve problems caused by too much borrowed money?

Now it seems that France is joining in…

BBC NEWS | Europe | France unveils huge stimulus plan

The question for me is relatively easy. Are we ‘saving’ the economy from recession, jobs and growth, or the political leaders? Recession is a natural part of the economic process in the same way that death is a natural part of life. Death cannot be avoided, can recession?

If you listen to the great and the good worldwide, you could easily be lead to believe that an economy going into recession is almost a choice – and that avoiding recession is simply an act of will.

The reality is that the world is going into recession – probably a very deep one – and there is precious little that political leaders can do about it. That being the case, large amounts of additional borrowing will simply encumber future generations with debt. Should that be the way to avoid something bad now?

If it is, then it suggests that the obvious way to avoid climate change would be to run every car engine 24 hours per day. And we wouldn’t believe that could work…

france, recession, Uncategorized
Comments [RSS 2.0]

4 Responses to If a problem involves too much borrowed money, since when is ‘borrowing more’ the answer? »»

Diane Farquhar

Comment by Diane Farquhar | 2008/12/05 at 11:30:24

Quite right Financialguy!

The recession is a necessary corrective process for an economy that has stoked up ridiculously unsustainable levels of debt.

Interest rates need to go up!
financialguy

Comment by financialguy | 2008/12/05 at 12:19:09

It is good to hear that I am not the only person that thinks that slashing interest rates (as the UK is now doing) is what got the USA into this mess in the first place.

By avoiding one recession by inflating another bubble with cheap money, Greenspan compounded problem upon problem. Now it seems as though everyone wants to follow the same lead.

I guess why not?

After all, the model is now proven to be successful!! Problems have been postponed until Greenspan is out of office – so why can’t that same model of short-term political survival be used elsewhere?
I-Blogger

Comment by I-Blogger | 2008/12/05 at 23:02:50

I am not so sure. People seem to have learned a lesson or two about earlier depressions. There is a big discusson now whether a massive Keynesian intervention in combination with low interest rates can turn the situation around. If it does not work, we will indeed burden future generations with even more debt. Politicians love spending money and the present crisis gives them all the arguments they need. I am worried that deficit spending is on the agenda again, but just sitting it out is not the option either. In Finland, for instance, they had a massive crisis in the early 90s. The only thing that was not cut was spending on research and innovation. The success of this strategy speaks for itself. But this crisis was rather local not global. I think we need to invest, but with care, in research and innovation infrastructure and in educating the people and embuing them with the entrepreneurial spritit and creativity that can get us out of this mess.

I-blogger
financialguy

Comment by financialguy | 2008/12/08 at 10:22:04

Interesting thoughts. I have long been a believer that when times get tough companies need to not cut back on their marketing budgets. As other firms slash their promotional spending, the few that don’t will stand out more in the crowd.

I guess that not cutting back on R&D and innovation spending is the macro version of the same thing.

As for whether cutting interest rates and using a global intervention, as you mentioned, can work – I am clearly in the “not convinced” camp. My worry is that all this borrowing, added to the huge amounts of borrowing that most western nations (and corporations and individuals) already have, is a one way path to devaluation, hyperinflation and depression.

Lets hope that my negative view is wildly innacurate…

Formerly in finance, now in the EU world, this is a take on financial and economic matters, EU Innovation policy intermingled with occassional interviews of EU policy professionals. Click here to find out more.

If a problem involves too much borrowed money, since when is ‘borrowing more’ the answer?

4 Responses to If a problem involves too much borrowed money, since when is ‘borrowing more’ the answer? »»