The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Opinion

Against the tide: Is excessive public-sector leverage necessary?

Piling on public-sector leverage in an attempt to cure a recession that was itself caused by excessive private-sector leverage makes no sense. It might even create stagnation.

What’s bugging me?

What’s bugging me is the consensus view that prolonged fiscal and monetary stimulus is necessary to ensure sustainable economic growth. The protagonists of prolonged fiscal stimulus deploy the argument that the economy is a twin-piston engine. Rising government dissaving is the result of falling private demand and thus of rising private saving. If the private piston of growth goes down, the public-sector piston of growth must go up. The marginal savings surplus in the private sector must be matched by the marginal decreases in savings by the public sector. If not, the economy will lapse into depression because of an excess of savings and a dearth of demand.

This is Keynesian economics. But as with all great macro theories, I have my doubts. The current rise in government dissaving is not the counterpart of falling private demand and rising savings. It is far bigger.

No risk of depression

There was never any risk of a great depression, which was a debt deflation spiral, because widely dispersed price deflation never happened and core inflation remained positive. Indeed, monetary policy during this crisis was the antithesis of what happened during the Great Depression. Also, trade protectionism was avoided on a major scale (or has been so far).

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree