More Quantitative Easing Reflects Severity of Long Term Adjustment Needed

One of the great difficulties in designing short term policy such as being unleashed in America is that there is no accurate measure of production potential. This means that capacity is idle, but forecasters have no idea whether or not the idle capacity is a permanent loss to the economy that will have to be corrected through structural changes, job and capital reassignment.

There is the hope, and is a risky hope that by increasing effective demand through government initiatives some of the idle capacity will become active.

The problem is that those who would demand credit for business need to be convinced that they can make a return on their borrowing. In the past decade, one gets the impression, rightly or wrongly that those demanding credit were primarily consumers, construction, speculators, large firms, merger interests, banks taking undue risks, insurance, and home builders.

The big question is who the increase in credit will benefit. If one said terrorists who want credit for arms deals that would cause a bit of worry, but perhaps these are just the very entities that will benefit most from more dollars seeking to make a return.

That the idea of more money in the system can produce jobs is simplistic. What it can do is produce votes for the Republican Party in the short term as these large corporate interests and many profligate consumers realize their dreams out of the Bush Administration's fling with property and a level of overall consumption unsupportable by the manufacturing side of the economy.

Whether, the demand for credit will come from small business is a risk, but even if realized, it will push ahead risky investment in time that could create a weaker base for efficiency in the longer term. Business that finds things easy feeds off an insatiable demand in America for rubbish or unnecessary spending.

That's the issue. A weak dollar does little to spur investment in efficient production in America. That would be too easy. But, it does create credit for foreign manufacturers investing outside America as these dollars filter abroad as the US balance of trade worsens. Suck, suck..

http://www.thehindu.com/business/Economy/article862912.ece

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