the case for fiscal stimulus

Martin Wolf today states the obvious, and states it well. This is necessary because many around the world, including more than a few finance ministers and central bankers, do not see what is so obvious to the rest of us.

[L]isten to the markets. They are saying: borrow and spend, please. Yet those who profess faith in the magic of the markets are most determined to ignore the cry. The fiscal skies are falling, they insist. ….

Are the markets mad? Yes, insist the wise folk: the biggest risk is not slump, as markets fear, but default. Yet if markets get the prices of such governments’ bonds so wrong, why should one ever take them seriously?

The massive fiscal deficits of today, particularly in countries where huge financial crises occurred, are not the result of deliberate Keynesian stimulus: even in the US, the ill-targeted and inadequate stimulus amounted to less than 6 per cent of gross domestic product ….

It is becoming ever clearer that the developed world is making Japan’s mistake of premature retrenchment during a balance-sheet depression, but on a more dangerous – far more global – scale. Conventional wisdom is that fiscal retrenchment will lead to resurgent investment and growth. An alternative wisdom is that suffering is good. The former is foolish. The latter is immoral.

Martin Wolf, “We must listen to what bond markets are telling us“, Financial Times, 7 September 2011.

Not convinced? Think that the bond markets are wrong? Read the entire column for more information, including facts, figures and charts.

Comments are closed.