(This is Part 3 of a continuing series. Go back to Part 2.)
There is much talk these days about "stimulating" the economy. Let's look at this subject:
The best way to understand the effects of stimulating the economy is to study the effects of "stimulating" the body. For instance, let's say we're feeling a little low energy and so we decide to take a stimulant, let's say cocaine. But it could be amphetamines or caffeine or nicotine, the effect would be the same.
At first, when we take a dose of cocaine we do indeed get a burst of energy. But where is this energy coming from? It can't come from the cocaine itself, which is a dead inert substance.
That increased energy can ony come from the living body. The cocaine acts as an irritant on the body, causing it to produce more energy that it wants to at that moment. All is well, it seems; we get more energy temporarily.
But there is a cost to this stimulation. And that is that the extra energy produced by the body must be "paid for" somehow. The way it is paid for is that the body at a slightly later time will produce less energy than usual as it seeks to rebuild its energy systems and supplies.
The end-result of this process can easily be seen in the habitual cocaine user, who tends to become haggard, emaciated and exhausted over time. Naturally, the cocaine user then feels that more "stimulation" is needed.
As greater amounts of "stimulation" are applied, they have less and less effect, since they are being applied to a body that is in a greater and greater state of exhaustion. Thus, a greater and greater energy "debt" is incurred by the body, and the process continues towards total exhaustion.
This is approximately what happens when a society applies economic "stimulation" to itself. Usually this is because the economy is acting "sluggish," and so the society's lawmakers or central bank governors add extra monetary muscle to the economy, either through monetary or fiscal means.
And indeed the stimulation does seem to have the desired effect at first. The economy seems to leap forward, only to seem after a while to return to its "laggard" condition. More stimulation is applied, and the economy leaps forward again, but it's noticed that more "stimulation" is needed this time.
What needs to be understood is that the "laggard" times are equivalent to the lower-energy recovery period that the body must go through after providing extra energy after "stimulation." After being "stimulated," the economy must also go through a period of lower economic energy while it recovers from the effects of the stimulation.
But normally, the economy (and the body) is not allowed to go through this recessionary/recovery period and rebuild itself naturally. Instead, there is always political pressure to "kick-start the economy" (or whatever the phrase of the day is), and so more monetary and/or fiscal "stimulus" is applied.
Over time, more and more "stimulus" is applied with less and less effect, as the economy's debt increases—just as the energy "debt" of the body increases with increasing doses of cocaine or other stimulants.
The eventual result is the total exhaustion of the economy in what we refer to as an economic "depression." It is worth noting that a depression, though painful, is actually a constructive process, since it allows the economic body to detoxify itself of accumulated distortions and energy-depletions and rebuild its energy foundations.
The United States and the world are very far along in this stimulation process now. The nations of the world have been "stimulating" their economies in one way or another for some 60 years now, and we're beginning to notice that larger and larger amounts of "stimulation" are needed for less and less effect.
Consider: The U.S. economy is presently undergoing massive stimulation. We've seen the largest tax cut in a generation and more is on the way. We've seen the largest two-year increase in federal spending since Jimmy Carter was president. We've seen huge military spending for a war. House refinancings have also added an estimated $140 billion to purses.
All told, it's estimated that these combined effects have added an extra $750 billion to the economy in just a couple of years—a massive stimulus by any measure. These should be flush times indeed.
Instead, the economy is wobbling. Job creation has been lackluster at best. Business investment is mostly stagnant. The stock market has been down from its peak for over three years now.
What's happening is that we're seeing the end-game of the stimulation process—more and more producing less and less effect until finally the economy heads downhill to recover itself.
This being so, within a few years, in my opinion, we're headed for an economic depression of biblical proportions so that the financially exhausted global economy can rest, recover and eventually rebuild.
This is similar to the person whose body has become physically exhausted from extended "stimulation"—to recover, the person must completely cease all stimulation and undergo an extended rest so the body can gradually rebuild itself.
Exactly the same thing happens with the economic body. Beyond a certain point it must "rest" for an extended period of time so that it can rebuild its foundation and recover itself.
This is a natural process, and must be allowed to run its course. Like any natural process, it cannot be speeded up; it happens at its own natural pace, like a tree rebuilding in winter to show its new flowers in the spring.
(This is the end of Part 3. Go to Part 4.)
—jim sloman, 5.1.03 for Sep 2
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