Economic Policy Conundrum

The world's economy is facing years of ill-begotten economic policies. The worst economic downturn in 80 years is the result of these policies. Healthy economic growth is savings based and thus is sustainable. However, the economic growth that has occurred was not based on savings and production, but was credit and policy induced. It was and is artificial and thus unsustainable.

The policies that were implemented included:

• Monetary policies - these kept interest rates low (artificially) for years
• Tax policies - favour debt financing over equity
• Regulatory policy - that allowed financial institutions to mismanage their operations eg excessive leverage
• Social policy - which pushed home ownership regardless of affordability
  

All of this combined created credit induced artificial demand. More and more debt was created.

The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.

Economic demand has to be savings driven to be sustainable.

What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.

What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.

I think the people want change, and are willing to go with lower growth based on real economic principles and values.

However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.