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The Biden administration’s massive stimulus package could boost the economy in the short term, but in the longer term, the debt that comes with it could have the opposite effect that the new president wants. It worsens productivity, slows economic expansion, increases social inequalities, thus eroding society and thus giving arguments to populist politicians like Donald Trump.
Joe Biden, the new president of the United States, launches his government with the initiative of a stimulus package of 1.9 trillion dollars, which is a good reflection of the current thinking of the American elite. The top ten thousand believe that no matter how large the budget deficit and public debt are due to the dispersion of state money. No warnings came that the spending could lead to hourly inflation and a devaluation of the dollar. So it’s easy to believe that this is just a riot of obsessed followers of the old school of economics, Ruchir Sharma, chief strategist at Morgan Stanley Investment Management, begins his analysis published in the Financial Times (FT).
Economics professors and economics experts in the media talk about inflation being dead and interest rates low. Therefore, it would be irresponsible for the government not to take out a loan to boost the economy that has been slowed by the coronavirus crisis from the resulting source. It doesn’t matter if it is in the billions or billions, as the dollar is the most sought after currency in the world. However, this view ignores the damage already being caused by the world’s mounting budget deficits and public debt, and is not as satisfying or dangerous as inflation or currency devaluation.
Persistent state intervention
The France Télécom author, citing reports from the OECD and the Bank for International Settlements, notes that labor productivity has slowed more slowly in the last four decades as a result of the constant strengthening of public economic intervention. So the efficiency has not improved enough. This, in turn, is holding back the growth of total GDP available to a growing world society, while inequality in the distribution of available assets has increased. It is not that it is not necessary to intervene in the economy in times of crisis. But about the combined effect of successive stimulus packages.
The new US administration argues that low interest rates allow governments around the world to spend indefinitely on credit for the foreseeable future. However, according to the author of the France Télécom article, low interest rates tend to be a trap. By encouraging the indebtedness of economic actors, it offers fewer incentives to improve efficiency. In other words, it slows down productivity growth and, because debt has to be paid, it draws money out of the economy in the long run. This, in turn, is holding back GDP growth.
High indebtedness is forcing central banks to keep interest rates low. That is, if they increased the cost of the loans a little, the debtors would not be able to repay them. This completes the trap, which makes the financial system fragile.
Money goes where you want it
Governments and central banks spend all the money they want, but cannot determine where the money will go in the economy. Much of it has not caused a large rise in consumer prices in the recent period because inflation has been reflected in rising prices of financial and other assets. In the 1970s, the value of the world’s financial markets was roughly the same as the value of the world economy, but now it has quadrupled. And this expansion, for the most part, has further enriched the rich, in whose hands financial wealth is concentrated.
During a period of constant state economic stimulus, over the past three decades, the wealth of the richest one percent of American families has grown by 300 percent, the next nine percent by 200 percent, and the next 40 percent. one hundred to 100 percent. Meanwhile, the bottom 50 percent have not grown at all, and in this round, the wealth of one in ten families is negative, meaning they have more debt than money and other wealth.
Meanwhile, recent studies show that the money injected into the economy has migrated to the least productive companies, including the deeply indebted zombie companies that would have gone bankrupt without Uncle State’s help. Furthermore, the monopolies that owe their privileged place in the corporate world not to their technological superiority but to their good lobbying power have done well.
It can’t be that beautiful
You don’t need a degree in atomic physics to be visible, things can’t be as simple as they seem. In other words, there is no free lunch, you cannot reach the prosperous society simply by printing and then spending the money. If the Biden government takes advantage of low interest rates to continue massive public spending, it will have the opposite effect in the long run, according to the France Télécom author.
It will only reinforce the problems it wants to solve: in the long run, it will lay the foundation for weak growth, instability in the financial system, and help widen the great social gap even further. Decades of economic stimulus policies have weakened capitalism and eroded its effectiveness. With this, it became less dynamic and less fair, society eroded, leading to the flourishing of populist politics that the Biden administration wants to roll back.
Missile speed expected
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