Solutions...

As the economy slips into a deeper recession by the day, the rate at which new 'solutions' to the crisis appear to be growing exponentially. Along with this, they also seem to be becoming increasingly desperate.

An issue (to me anyhow) is that it appears the same people who looked the other way, by ignorance or by design, when the problems were growing between 2001 and 2007 are now the same ones telling us that they have the 'solutions'. Errmmm.... Ohhhkayyy...

I've found a useful acid test when one of these 'solutions' is announced is to consider how we would switch them off when things have returned to normal. If it is difficult to see how they would switch it off without causing catastrophe then you have an idea that is likely to be poorly conceived and short-termist. Here's 2 pertinent examples:

1. Printing money - Usually, printed money leads to further misallocation (i.e. badly spent on things like failing companies or the public sector) making the problem worse. This means 'good' companies struggle to compete and also the budget deficit (government spending gap) becomes bigger and cannot be funded without crippling tax rates. Switching the printing presses off therefore leads to bigger problems downstream, reducing the motivation to stop printing. Viscious circle formed. (all of the above assumes your currency is not spanked by the markets first!)

2. Lower interest rates - Low interest rates in recent years have encouraged too much credit. Now the economy can't take 10% rates. Arguably now we can't even take 5%. But 5-10% has been normal for the last 50 years. How do we get back from 1.5% to more normal values. Dear knows!! Oh I know, a lot of pain downstream...

I'd argue that these mistakes have already been done to death. Now we've found we can't get back to normal. Since 2001, too much money has been injected. Our leaders (globally) had the chance to nip it in the bud in 2003 and 2005 but chose not too because there was a risk of recession if they did. They might become unpopular and get voted out. Now, don't we all wish we could turn back the clocks....
(2005 was such a missed opportunity for the UK - I get very frustrated that we chose to reduce rates then when we had the chance to avoid the worst consequences of what we have now)

As solutions come thick and fast, think of how we get back to normal in the long term before concluding whether it is 'the right thing for hard working families' now. Sometimes doing nothing is the better option...