The Bubble Of Everything: How A Debt-Driven Economy Creates More Frequent Crises

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The pace of global recoveries since 1975 has been slower and weaker, consistently every time, according to the OECD. Recoveries take longer and happen slower. At the same time, periods of crisis are less aggressive albeit more frequent than prior to 1975.  Another interesting evidence of the crises and recoveries since 1975 is that almost all economies end the recession period with more debt than before.

Global debt has ballooned to all-time highs, more than three times the world GDP. For the economy to really recover, we must stop the race of perverse incentives created by the wrong analysis of the origin of crises and the solutions that are often proposed in mainstream economics and politics.  I agree with Johan Norberg that the two main factors that have driven the phenomenal progress we have seen are free markets and openness. The freedom to innovate, experiment, create and share must come with the right incentives.

For decades, governments and central banks have always identified the problems of the economy as demand problems, even if it was not the case. If there was a crisis or a recession, governments immediately believed that it must be due to lack of demand, and subsequently decide that the private sector is not willing or able to fulfill the real demand needs of the economy, even if there was no real evidence that companies or citizens were investing or consuming less than what they needed. The entire premise was that companies were not investing “enough”. Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and overcapacity but never suffer the consequences.

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost.

Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product (GDP) at any cost regardless of the quality of its components. GDP is relatively easy to inflate. I always explain to my students that GDP is the only economic calculation in which you add what you spend with what you earn. GDP can be inflated through government spending and with higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to finance productive investment and allow the economy to grow, while efficiency, innovation, and technology allow us to be more productive and receive more and better goods and services at cheaper prices. It is a virtuous cycle.

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Bruce Wilds 1 month ago Contributor's comment

The recently passed 1.9 trillion dollar relief package will simply allow people and governments to take on more debt. While helicopter money may accomplish a certain goal such as supporting a market, it is poorly targeted and seldom addresses the root problems in a financial system or economy. The following article argues it is a poor way to move an economy forward.

brucewilds.blogspot.com/.../...opter-money-is.html

Alexis Renault 1 month ago Member's comment

But won't it help to stimulate the economy at the same time? Not to mention, if people and companies can no longer support themselves, that will become even more of a strain on the government.

Bruce Wilds 1 month ago Contributor's comment

I expect the long-term strain put upon the government to outweigh most of the short-term economic gains flowing from this spending.

Alexis Renault 1 month ago Member's comment

Perhaps. Though I'm not sure you can put a price on the lives of many people who might literally have ended up starving or homeless without this extra cash.