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9/12/2011

“Buying time” is simply not an appropriate remedy for the problems facing the global economy and the clock only has a few more tics before things get ugly

As we have asserted numerous times over the recent past, the notion of “buying time” adopted by policy makers to let the economy grow its way out of trouble is not only inappropriate for the current state of global affairs but is rather dangerous.  This notion of buying time actually refers to the tactic of policy makers adopting short term “fixing” policies that address obstacles in order to preserve enough time for the natural market forces of an economy to self-heal, so to speak.  A prime example for the current state of the US economy would be to avoid major financial market downturns (sharp price declines in Bonds or Stocks) so that the real estate market could eventually bottom out and turn upward again.  The healing process over time for housing would hopefully transpire as new housing starts decline and populations rise, hence a greater balance of supply and demand.  A healthier real estate market would help heal other parts of the economy as a stronger consumer and banking sector could provide stimulative activities. Reality is however that the housing bubble was so massive that its fallout will take a decade to self-heal while chronic unemployment has no self-healing process and the situation is deteriorating.  This “buying time” seems to have been the hope of many policy makers under pressure to actually adopt sound strategies to remedy the current debacle.

The buying time tactic can be compared to the “kicking the can” scenario, and as we have emphasized time and time again, “kicking the can” will not work.  Case in point has been the EU situation, where short term bailouts of Greece simply were examples of can kicking and now it appears that time is up and the ramifications of not adopting more aggressive and sensible measures (e.g. letting Greece leave the EU) will prove dire.

The same is true in the US, where the process of job destruction continues to erode the core health of the economy.  Plans of printing more money and increasing the deficit to create short term fixes to the unemployed will not work, and the ramifications of not addressing destructive outsourcing of labor will be dire for the US over the medium term (not the long term anymore).  Buying time you say?  Time is up.