Deficit Spending And Money Printing: A German Point Of View

Submitted by Dr. Ulrich Salzer, a German economist and banker, Munich

Deficit spending And Money Printing:  A German point of view

The leading macroeconomic Nobel-Laureates, the Central Bankers as well as most Politicians have reduced their economic judgment on how to get the economies in Europe and Japan back to sustainable growth on just two recipes: public investments in infrastructure to be financed by additional public debt and, second, an expansive money market policy based on printing more money and reducing interest rates to zero or even beyond zero to negative rates!

And if the capital markets don’t swallow additional public debt, then the Central Banks will step in eagerly as Investors – regardless if this is in line with their statutes!

The expected results, backed by the leading macroeconomic wisdom, should be to kick-start economic growth, to induce private industry to invest and banks to lend to private investors, and thereby to reduce unemployment, and get deflationary tendencies back to an inflation rate that is now officially regarded as ideal if it oscillates around 2 % p.a. When and why this “two-percent” benchmark was introduced for the first time I can’t remember, but everybody today takes it for granted and repeats it like as an undisputed target of Central Bank’s money market policy. Included in this assumption is ever more public debt as the guarantor for lasting GDP-growth!

I never understood why macroeconomics should be regarded as an academic discipline if it is in practice reduced to these rather simple theories of how to handle a recession or even deflation! Maybe Alfred Nobel was just as clear-sighted as I am, and consequently never introduced a Nobel-prize for economics. That was done after his death by the Central Bank of Norway, which also contributed the required funds. It still does so, and not the Nobel foundation!

My personal advice is to stop handing out any more Nobel-prizes for economics to any more American professors on any new theory how to steer economic development and sustainable economic growth, because none of them has ever worked.

There is a lot of blame offloaded onto Maynard Keynes by critics of the present ruling opinion of more deficit spending by governments. But I don’t believe that Keynes would approve any of today’s Nobel-Laureates who saw no other way out of recession than by money printing in unlimited amounts and years of deficit spending by already over-indebted economies. According to Keynes public investment on deficit could be regarded as an “ultima ratio” to re-kick-start a slow economy, but he would never have advised any government that is already highly indebted to increase this debt even more!

In his theory, deficit-spending should be a limited action in time and amounts, and directly afterwards this debt should be repaid by the additional tax income from the stronger revenues of industry and private individuals who have profited from the intervention of the State.

But what our economists and central bankers are recommending nowadays is completely different from “short-term-kick-starts” – our systems are so full of the sweet drug of government deficit spending that (like a drug-addict) it constantly needs heavier doses of the same drug!

It was not long ago that the American Treasury Secretary publicly blamed Germany for not using its remaining credit standing for another round of deficit-spending in order to help Italy, France and other Southern European countries. As if more public debt and burning straw in Germany would have any impact on the southern countries’ economies without any serious political and economic reforms in those countries themselves to fight the weakness at its real source!

As long as our “economy doctors” don’t know anything better than to prescribe more drugs instead of getting the patient off the needle and help him to abandon the ever increasing drug doses, we will never get our economies “back to normal”!

We should never forget that at least the European economies had no real problem as long as the public debt to Gross National Product ratio remained within the Maastricht limits of 60% and before liquidity in the banking sector was multiplied without limit, thereby creating big bubbles in the financial assets of the banks which finally led to the financial crisis of 2008.

Japan is the very best example to prove that the therapy of deficit spending and money printing is dangerously wrong: it is now 25 years since Japan has adopted this cure. If anybody needs proof that the prescription was unprofessional and ineffective, he should look at the results to the Japanese economy and its public debt. Although hundreds of billions of Dollars have been spent during this period on programs to stimulate the Japanese economy the effect was that Japan fell from one recession into the next depression and the public debt ratio to GNP has meanwhile reached the astronomic bench mark of 230% (!!), which is double that of Greece and four times higher than the Maastricht criterion!

I am certain that Maynard Keynes would turn in his grave if he knew to what extent his theory was misinterpreted and misused! Of course it’s a big temptation for every politician to utilize the sweet but toxic medicine of deficit spending and more public debt rather than to introduce hard reforms on public budgets, on social spending and other benefits to their voters. 

It’s also a big mistake that European governments have disregarded the traditional role of the European Central Bank as the watch-dog against inflation. In creating the ECB, Germany never consented that it should have more responsibilities and more authority than the Deutsche Bundesbank ever had.

It’s just like with deficit spending Keynes had recommended under certain conditions:  it may be acceptable if the Central Bank acts as “Lender of last resort” in case of actual liquidity crisis. But this should be strictly on short-term basis. What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a.  Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone,  additional furniture,  more TV-sets, more laptops etc, etc. Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?

Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?