On double-dip recession


Via the Financial Times:

The US Federal Reserve on Tuesday took a first step toward extending its crisis-era monetary policy regime, as it downgraded its view of the economic outlook amid rising fears of a “double-dip” recession.

I expect the Bank of England to do similarly at 10:30 this morning.

On 2 September 2009, I took the risk of explaining why a senior economist writing in The Times was bound to be disappointed when he wrote, Now it’s looking like V for victory over recession. I explained that he was wrong because the contemporary mainstream lacks a robust capital theory, so most economists are misled by distorted data. I wrote

No one is arguing that the present interventions by government are not giving the impression of prosperity; we agree that injecting new money creates economic activity. However, these measures create only an illusion which cannot last and which succeeds only in postponing and worsening the unavoidable crash. Society can ill-afford that outcome.

O’Neill is right: things look better. Unfortunately, this is another artificial boom which will not last.

You can find the article here.  In due course, the Times reported, Economists revolt over surprise recession data. I repeated that “most economists allow themselves to be misled by a superficial reading of numbers distorted by central bank action.”

Injecting more new money, whether through QE or credit expansion in excess of real savings, will not “fight recession”. It will merely delay and worsen the eventual downturn, because injecting new money is bound to shift activity from sustainable economic action to action supported only by that new money.

Sooner or later, the economic paradigm must shift to accept the importance of time and hence a robust capital theory. That moment cannot come too soon.

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