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    everything we should be doing to the banks we're doing to the auto makers..., 2009-04-30 09:18:32 | Main | the banks aren't just insolvent anymore..., 2009-04-30 14:58:55

    Delong:

    that the stimulus is going to go wrong becomes very visible in advance.
    1. If the stimulus is going to be ineffective because it generates bottleneck-driven inflation, we can identify that problem as the price or wage of the bottleneck good or service spikes.
    2. If the stimulus is going to fail because of capital flight-driven inflation, we will see the value of the dollar collapse as foreign-exchange speculators front-run the capital flight and then we will see import prices spike and put upward pressure on prices in the rest of the economy.
    3. If the stimulus is going to fail by crowding out private investment, we first will see the medium-term corporate interest rates relevant to financing plant expansion spike.
    4. And if it is going to impose a crushing debt repayment burden, we will see long-term Treasury bond interest rates spike instead.

    His point being that you can quickly modify a stimulus that produces any of those four negative feedbacks, and that we haven't seen any of them yet. Probably, one would say, because 400 billion a year - half of which is tax cuts that will be saved, so 200 billion a year - in any economy that has already shrunk by more than double that is just peanuts. On the other hand - with the incredibly immense amount of borrowing being sunk into cover the financial sector's poor allocations of future capital - to imagine a future without four happening is nigh-impossible.

    Maybe Goldman Sachs just controls everybody elses' central banks as well as ours and our government and the fantasy can continue forever.


:: posted by buermann @ 2009-04-30 11:48:59 CST | link





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