It’s a Supply Side Revolution or We’re Toast
When Mervyn King sat down to write The End of Alchemy he never expected to indict an entire profession, but he did just that, from graduate to post graduate schools, investment banks, even government Central Banks were enveloped in his outstanding apologia for fresh water economics. King doesn’t stand alone, he writes in the tradition of Adam Smith, Ferguson, Friedman, Hayek and others who admonished the arcane nomenclature of Keynesian thought. What the Austrian/Chicago school knew was that civil society matters. Just ask the mandarins of Islamic Civilization; they all face west in the hope of surviving the social challenge that modernity bequeathed to them. It remains to be seen IF they’ll survive.
Here’s what Dr. King wrote:
“I came to believe that fundamental changes are needed in the way we think about macroeconomics, as well as the way central banks manage their economies. A key role of the market economy is to link the present and the future, and to coordinate decisions about spending and production not only today but tomorrow and in years to come. Families will save if the interest rate is high enough to overcome their natural impatience to spend today. Companies will invest in productive capital if the prospective rate of return exceeds the cost of attracting finance. And economic growth requires saving and investing to add to the stock of productive capital and so increase the potential output of the future economy.
In a healthy growing economy all three rates: the interest rate on savings, the rate of return on investment, and the rate of growth must exceed zero.
Today, however, we are stuck with extraordinary low interest rates, which discourage savings (the source of future demand), and if maintained indefinitely, will pull down rates of return on investment, diverting sources into unprofitable projects. Both effects will drag down future growth rates.
We are already some way down that road.”
Look, its either a supply side revolution, or we’re toast. My monies on the deplorables.
Originally published on William Holland’s website.