Since the beginning of the Federal Reserve’s annual Jackson Hole get together, the message has been monetary policy has done all it can do to restart a self-sustaining economy and from here on out it is the job of fiscal policy. This message is remarkable. It shows an absolute lack of understanding of why the monetary policies that have been pursued since the beginning of the financial crisis have been ineffective and why fiscal policy won’t succeed either.
In late 2008, I said absent stimulative monetary and fiscal policies the global economy was in a downward spiral. I went further and noted these stimulative policies could buy time to fix the cause of the downward spiral, but by themselves these stimulative policies could not fix the underlying problem.
Nine years after the August 9, 2007 beginning of the global financial crisis, central bankers just admitted I was right. But they went further than that. They also admitted their stimulative policies are no longer effective at buying time and, in fact, are creating more problems for the global economy. Hence, their plea for help for fiscal policy to take over buying time.
However, no place in their plea for fiscal policy to buy more time did the central bankers mention nothing has been done to fix the underlying problem with the global economy. In fact, this problem has been getting exponentially worse.
The problem, as I said in 2008, is we have debt outstanding the borrowers will never be able to repay.
Readers of Transparency Games know that the cost of hiding the losses on this debt grows exponentially over time. It grows at a much faster rate than the rate of growth of the underlying real economy. Which means the drag from this excess debt also cancels out the benefits from fiscal and monetary stimulus.
One of the reasons for the restoration of transparency across the global financial system is this will reveal who is holding the debt that can never be repaid. It will also bring market discipline to force the holders of this debt to write down the value of this debt to the higher of what an independent third party would pay for the collateral or the level the borrower can afford to repay. This eliminates the excess debt problem and allows the global economy to resume growing.
As evidence this debt write down has always worked, I have pointed out the US experience during the Great Depression, Sweden’s experience in the 1990s and Iceland’s experience at the start of the financial crisis. When debt is written down, recovery happens shortly thereafter. When debt is hidden and not written down, recovery never really occurs.