Will more drinks cure a hangover?

What role can governments play? Well-placed infrastructure investments that pass rigorous cost-benefit tests can be useful investments both to support aggregate demand and to supply productivity enhancements. Public debt financing for these sorts of projects can be a sensible option. Economy-wide balance sheets can be enhanced by them.

What about short-term government cash handouts? Ironically, these may be more valuable in helping households “de-leverage”, and rebuild their balance sheets, than in supporting aggregate demand in the short term. Indeed, if households save these “cash splashes” rather than spend them, they are likely to do more to deal with the fundamental impediments to sustainable growth than if they spend them.

However, there’s no “free lunch”. These “cash splashes” come courtesy of increased public sector net debt. This will have to be serviced - by taxpayers - down the track.

In short, the “cash splash” demand-support strategy is likely to be a pretty ineffective option, measured against a spending-boost “pot-holing” objective. It could be better as a way of helping the private sector to accelerate the needed “de-leveraging” process. Unfortunately, this support comes at the expense of increasing the public sector’s borrowing requirement later. The taxpayer will foot the bill for this.

What role can politicians play? Mainly, shut up. Please! Confidence is both crucial and shattered at present. Your blathering about the sky falling in is making things worse.

My mother always said to me:

“If you can’t say something nice, darling, don’t say anything at all - at least not in public. It’s better for everybody in the long run. Including you!”

The newly appointed President Obama has obviously had similar advice, at least recently. Maybe other national leaders should “phone home”. It could well be in their own interests. The global economy might well be a beneficiary too.

Nearly two decades ago, Paul Keating was pilloried for saying: “this is the recession we had to have”. Only a very “courageous” politician would repeat that statement today. In my opinion, the current correction (a.k.a. crisis) is the debt-reduction/asset price deflation we needed to have, in the interests of longer-term, sustainable, economic and employment growth. But then, I’m not standing for office.

When will the current correction (a.k.a. crisis) end and recovery begin? If I knew the answer to that, I’d be very rich. I’m not, but I can point to a couple of bellwethers of recovery.

First, the more the over-committed sectors (e.g., mortgagees, highly-geared businesses) are able to “de-leverage” (i.e., reduce the net debt on their balance sheets) the closer we are to a sustainable recovery.

Second, the lower asset prices fall (prices for houses, other property, shares, etc) the closer we are to wiping out the recent asset price bubble. Indeed, for some assets, current prices may have fallen well below sustainable levels already.

Excess debt and unsustainable debt-servicing costs must be eliminated. The asset price bubble must also be pricked. These are the effects of recent excesses. They must be wiped out. Then recovery is possible.