Echoing many of Jim Grant’s recent fears, Guggenheim Investments’ CIO Scott Minerd fears the consequences of policymakers returning to the same tools employed in the financial crisis as a grand Faustian bargain.
“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 gross domestic product (GDP) growth in the United States will fall by 15 percent 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.
This process of accumulating larger debt balances after each successive downturn is often referred to as the great debt super cycle. Over the past decades, the successful use of Keynesian stabilization policies has increasingly raised the confidence of investors and creditors alike that government can successfully truncate the downside of any recession.
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