The debate about whether governments should borrow their way out of recession continues across the world.
On one side, Keynesian economists like Federal Reserve Chairman Ben Bernanke and Nobel Prize winner Joseph Stiglitz argue that prolonged spending has held up economic growth at a time when private consumption and investment has fallen off a cliff.
On the other side are the likes of fames investor Jim Rogers, "Doom, Gloom and Boom Report" publisher Marc Faber and Harvard professor Niall Ferguson, who said taking on all this debt at a time when deficits are already very high is leading the US, UK, euro zone and Japan to financial ruin.
Now the economists at UK research company Independent Strategy have waded into the debate and come to the conclusion that stimulus spending by President Barack Obama, Prime Minister Gordon Brown and others has been a complete waste of time and simply saddled future generations with a big bill that will crowd out the private sector for years.
Because the recession never saw deflation take hold and monetary policy was so loose there was no need for further government stimulus and central bank asset buying, Bob McKee, economist at Independent Strategy, said.
With sufficient wealth in the private sector after the financial crisis of 2008-09, private investors would have simply stepped in at a point where they believed the market was cheap enough to make a return at the loss of only a few years of ‘"excess gains," McKee said in a report.
His key points are:
- Use of government balance sheets to accumulate massive leverage when excessive private sector leverage got us into this mess in the fist place was wrong.
- Borrowing so much at a time when private saving rates were not rising at the same time means US and others are now dependent on foreign buyers of their debt.
- Spending has been the "bad sort" that prevented the clearing of the asset-price bubble.
McKee called on the Keynesian camp to explain how the Scandinavian economies managed to recover so quickly from the much tougher fiscal and regulatory policies they implemented in the wake of the banking crisis of the 1990s. Expect this debate to run and run.