In my early adult walkabout
in Europe, my wife and I visited a fois gras farm outside Bordeaux. Having slaughtered livestock in my past
(infrequently) I was not in the least bit squeamish around working farms where animals are commodities. Nevertheless I
was struck by the image â€“ hanging from the ceiling in the barn were large
containers of feed connected to funnels which had leather straps fastened to
the heads of geese with broken bills in a several times a day session of forced
feeding with one goal in mindâ€¦bloating the liver of the geese.
Yes I still eat fois gras
and confit, though admittedly less so in the last year, and I am glad that
places like Chicago have overturned bans on this delicacy.
And I hold nothing against the lovely French family that showed us their
fois gras farm with joy and pride. It was the best fois gras I ever
tastedâ€¦we were invited into their house and served the exquisite food.
But the image of that day in
the barn in the French countryside stuck and it again comes to mind as a visual
in light of the discussion over getting banks to lend and more importantly
households and firms to borrow for consumption and investment.
Context is everythingâ€¦firms
do not need bank loans to expand capacityâ€¦they need bank loans to tide them
over to better times or if they are overleveraged they really donâ€™t need loans
at any price other than ones for debt restructuring/consolidation.
Household balance sheets on balance are far worse. Cheap credit fuelled a
massive wave of consumption that borrowed from future consumption and needs to
revert to the mean. Firms and households are like the geese in that
French barnâ€¦they donâ€™t want or need any new debt to finance consumption.
They, like firms, need low cost loans to replace higher cost loans, taking the
difference to pay down debt and save, not spend.
Yes a functioning banking
system (and shadow bank system) is essential for any recovery to take
hold. But force feeding households and firms stuffed to the gills on a
decade of cheap credit and massive consumption by households and massive
investment by some firms is pushing on a string. No amount of wishing a
return of risk seeking behavior for households and firms is going to get the
bloated goose to eat more corn. A liquidity trap is all about no demand
for money in a world flush with money.
This is why the ideologues
on the right are misguided (and some on the left) when calling for tax cuts
over government spendingâ€¦a dollar of a tax cut in the current economic
environment (fiscal policy needs to be made in the context of the business
cycle not fixed rules and surely not supply side fantasies) is going to yield
< a dollar of spending and < a dollar for GDP. A dollar of government
spending is going to lead to a dollar of spending for GDP. When the
private sector is withdrawing from spending and investing in the dramatic
degree we are currently witnessing, the government can or cannot fill the
void. If it does not, the deflationary spiral that is assured will leave
GDP even more in the red and unemployment more in the black, making government
fiscal deficits even larger if $800bln is thrown into GDP (well in this bill a
lot less as it includes tax cuts when it should not have any tax cuts).
I am not opposed to tax cuts
(or tax hikes)â€¦they have their place and timeâ€¦just not now. There are
appropriate times to starve government with tax cutsâ€¦just not now.
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