Bonus Reckoning

We're pleased to bring you a bonus reckoning today from DR founder Bill Bonner, carrying on his recent theme of a 16th Century explorer trying to navigate the current economic landscape:

Imagine the economic Vasco da Gama trying to make sense of it. The intrepid explorer arrives in our world, 2007, and what does he see? After three and a half decades of credit-gone-wild, consumers have dug themselves so deeply in debt it will take them many years to climb out. And there are the Bernanke Fed…and Mervyn King’s Bank of England…standing on the edge of the hole offering help. “Here is a shovel…” they say, “keep digging.”


If middle class consumers can’t keep spending, who can? Business? Maybe. But why would business increase spending when consumers are cutting back? Not likely. And why would they increase spending in America, when they can reduce expenses by outsourcing to Asia? And why would they knock themselves out trying to sell more products to people (in America and Britain) who can’t afford to buy more? Instead, if they are going to expand, they’ll probably expand overseas.


That leaves government. Government could increase spending. It can create the money. And it might see government spending as the only way to avoid a major slump. Do leading economists recognize this? Do political leaders see it? Do they have the will to do it?


We don’t know the answers to these questions. But a handful of economists are beginning to talk about it. One suggests that the U.S. Federal government would have to increase spending by a trillion dollars or more to make up for the deflationary effects of the housing slump.


What could the United States spend so much money on? Infrastructure…and war, dear reader.

The Daily Reckoning