Lawrence Summers, Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a coordinated effort to boost demand and lift the world out of recession. Is this a mistake?
Clearly the governments have to do something to help stem the tide of a major correction to the world economies. A correction that came about because of the inflated consumption, consumption based on most of the world living outside our means.
As with all systems of energy flows, and the economy is nothing more than a system of energy flows, it will seek a state of equilibrium. What goes up must come down. And this is a good thing.
But now the government is calling for a re-insertion of demand. While this may solve the problem in the short term, it can also lead to yet another correction. The real question is what is a sustainable level of demand? What is the level of worldwide demand that will allow for continued and sustainable growth? Clearly it is not the level we have experienced for the last decade.
On one hand this is a good thing. All around me I hear people talking about changing their life style, reducing their expenditures to those items that are truly meaningful. People are asking, do I really need a new car every three years, do I really need to eat as often as we have, can’t I find meaning and purpose in what we have and not seek to fill a void through consumption?
But such a switch in values, while overall a very healthy move for our society, leaves a level of uncertainty in the markets that I believe is underlying the weakness we are experiencing. Do automakers plan for 17 million cars a year or is the current rate of 9 million where it will stay?
The question I do not see anyone talking about is the one that will attempt to forecast what the real sustainable level of demand is. Until this question is answered governments will not know how much stimulus is the right amount, business will not know how much growth or contraction to plan for and we will limp along in a state of uncertainty. A state that is never good for the collective psyche.
Norman Wolfe | President/CEO | Quantum Leaders, Inc