Friday, March 27, 2009

Latest South Park episode is on the money

Ironically, this is one of the clearest expositions of what ails the economy. The private sector -- particularly the consumer -- is overleveraged. The government has simply not been running large enough budget deficits to sustain sufficient private sector net financial wealth commensurate with the level of aggregate demand we had grown accustomed to. Aggregate demand was sustained instead through financial engineering and excessive leverage.

Now we are in the inevitable deleveraging stage, which is extremely disruptive and painful. The best and most effective way to shorten this stage is for the owner of the money printing press to fire it up and to disburse money as fast and as equitably as possible to the private sector. In the South Park episode, the owner of the printing press is Kyle with his no spending limit American Express platinum card. In the real world, it is the Federal government.

I am more optimistic about the economy in the intermediate term because of the automatic stabilizers built into the Federal budget. As the economy weakens, the budget deficit grows, and this works to correct the problem. So far, though, the government has done too little on the fiscal side. The stimulus in 2008 was done in a timely fashion, and it was the right idea, but it was far too small. The actions of the Obama administration so far have been a waste. They are more focused on seizing an opportunity to enact a long-term liberal agenda than they are in getting the economy going again.

Still, the economy will be well on its way to recovery in 12-18 months. The recovery could be faster and stronger if the right fiscal policies were enacted, but it appears we can never count on the government to do the right thing.

No comments: