Growth of Government, Corporate Debt a Faustian Bargain

Policymakers are returning to the same tools employed in the financial crisis a decade ago.

by Scott Minerd

“In Goethe’s 1831 drama ‘Faust,’ the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied upon quantitative easing (QE) instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history.” – Scott Minerd, “Global CIO Outlook,” August 21, 2012

With the global economy slipping into recession and many economists estimating second quarter GDP growth in the US will fall by 15% or more, the world is being confronted with the worst downturn since the 1930s.

In the post-Keynesian era, the standard policy solution to a business cycle downturn has been for governments to temporarily offset any decline in demand with increased fiscal stimulus and easy money. This prescription has provided for smaller and less frequent slowdowns. The ultimate consequence is that businesses and households have been carrying larger debt loads and smaller cash reserves, confident that policymakers will restrain the severity of the consequences created by any shock to the economy.

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