The central bankers who saved the world economy are now being told they risk hurting it.Even as the International Monetary Fund cuts its global growth outlook, a flood of stimulus is running into criticism at the World Economic Forum’s annual meeting in Davos. Among the concerns: so-called quantitative easing is fanning complacency among governments and households, fueling the risk of a race to devalue currencies and leading to asset bubbles.Central banks can buy time, but they cannot fix issues long-term,” former Bundesbank President Axel Weber, now chairman of UBS AG, said in the Swiss ski resort yesterday. “There’s a perception that they are the only game in town.”
Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.
GDP (Y) = Consumption (C) + Investment (I) + Government Spending (G) and Net Exports (X-M)
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Because GDP counts government salaries as "government expenditures" as soon as the government hires a person. But the "consumption" and "investment" parts of GDP only count genuine purchases by the private sectorSo if a private sector product spends years in the incubator, burning through thousands of person-hours of work and millions of dollars of salary--but never sees the light of day--then the product never shows up in GDP. But if the government had hired those same workers who worked just as long on a similarly fruitless project, their labor would give a big boost to GDP.Government hiring creates GDP by definition. Private hiring only creates GDP if the worker actually creates a product.I’d further add that government spending, which represents coercive transfers from productive sectors of society, hardly accounts for value added or productivity growth to the real economy.
The welfare of a nation can scarcely be inferred from a measurement of national income.
Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what.
Economics is not a dry subject. It is not a dismal subject. It is not about statistics. It is about human life. It is about the ideas that motivate human beings. It is about how men act from birth until death. It is about the most important and interesting drama of all — human action.