Europe's Problem: Bad Investments

Over at Modeled Behavior, Karl Smith points out that Europe's problem isn't just a balance of payments problem. It's a malinvestment problem.

If, say, Portugal had borrowed lots of money in the last decade and invested it in gold, it really wouldn't have a problem at all. It would have a huge debt burden but also a corresponding asset that is liquid enough to allow it to service the debt.

This is small example of a problem overlooked by a lot of macroeconomic types who focus on "aggregate demand," as if the actual things produced through government sponsored demand didn't matter. But they do matter, a lot.

This one of the reasons that government spending can slow the economy.

It misdirects spending to political ends, rather than economic ends.

That is, it homogenizes spending, which raises the error cost of investments.

Europe's debt plagued governments wouldn't be in such dire shape if they hadn't spent all that borrowed money on things that they can't or won't sell.

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