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Economic Stimulation, too much, too little

Published on: 10:19AM Oct 07, 2010

I saw an interesting article recently in which the author was addressing the notion of competition among nations to devalue their currency, hence improve relative exporting position. His view, a reasonable one it seems to me, was that Japan, the US and England were not about devaluation of their currency but were trying to stimulate their economies. China’s refusal to let the Yuan rise to appropriate levels puts pressure on the manufacturing sectors of both Brazil and India. The author thinks that the Euro area will, sooner or later, need to engage in quantitative easing, aka stimulus. 

The best that economists can do in analyzing the great depression of the 30s is to point to possible problems, the gold standard being a large problem in most eyes, and to say that removing stimulus too soon appears to have caused the "double dip." Farmers were beset in the 30s both by an economy that couldn’t buy farm products and by a lot of ugly, dry weather in the mid-west. Brutal doesn’t do justice to what I’ve read and what I heard from my parents who grew up on small farms in East Texas. They were young adults when the depression descended.

There are two errors our government can make at this moment: under-stimulation and over-stimulation. Over-stimulation will lead to inflation. Inflation can be controlled, and removed from the economy. The most recent tale of excessive inflation was that of the Nixon & Carter years which Paul Volcker was forced to solve by raising interest rates to painfully high levels.

Under-stimulation will lead to a replay of the 30s. The Republicans and those Democrats who now join them in campaigning for a great belt tightening in D.C. are selecting the risk of a double dip depression, one that will break the backs of farmers and of the non-rich everywhere. ADM, ConAgra, Cargill and the other corporate farms will get bigger, putting more money into political war chests, making the political equation one of a few votes lost today while gaining a lot of money and ability to buy a lot of votes tomorrow.

Disclosure: I’m an equal party basher. The only president I’m willing to defend whole-heartedly is George Washington. JQ Adams was perhaps the best, most knowledgeable diplomat to ever sit in the White House. Sadly, he was politically inept.

You will find that I bash Republicans more than Democrats. That is true only because I find them to be even less good for the country than the Ds. There are rumblings that we will see one or more new political parties in 2012. If true, that would upset the apple cart in DC, which is what I think needs to be done.