Wednesday, 30 April 2014

Animal Spirits – Caging our Wild Side

Money can bring out the worst in people so it might be time to rein in the finance sector which offers ways for us to get into trouble

Economists tend to assume that we are all boring (and the feeling is likely mutual).  According to economic theory, we are thought to act in a rational manner, assessing how best to spend our cash like calculators with legs.  Not only is this an overly simplistic view but it has resulted in economists ignoring how our emotional sides affect the economy.  The global financial crisis is an example of what can happen when animal instincts such as greed and fear take over.  Economists need to take a closer look at how our emotions can drive the economy and how we can be saved from ourselves. 

Reality is messy

Economics is the study of allocating scarce resources.  It focuses on how consumers make the most from what they have.  At the same time, competition between firms ensures that products are priced efficiently so that as much output as possible can be generated from limited input.  Economists would like to think that our sober side helps keep everything running as it should.  But when money (and everything that money brings with it) is involved, our primal nature can take over with ugly consequences.

The worst of our traits kick in over booms and busts.  When times are good, we hear stories of people making easy money and we want in too.  Like greedy kids in a candy store, we buy a second or get shares in the latest stock market fad in the belief that prices are sure to rise further.  Prices will climb as the lust for more wealth attracts more and more victims.  But with gains in asset prices typically outpacing the rest of the economy, this can only last for so long. 

When asset prices start heading downwards, fear is the overriding response.  Companies slash plans for investment and lay off staff in order to stay in business.  Consumers also retrench by cutting back on spending and asset prices slide downwards as higher prices no longer seem sensible.  Assets often end up being sold off at bargain prices as cash is needed to pay off debt taken on during better times.  Fear also reached chronic levels among banks who would not even lend to each other in the aftermath of the global financial crisis.

How we get ourselves in trouble

Change is a necessary part of an economy developing over time as certain sectors expand while others wither away.  But what Keynes labelled our “animal spirits” result in periodic bouts of instability that can hamper the expansion of any economy over time.  Rather than dealing with our insecurities, most economists choose to ignore them.  A common argument used by economists is that financial markets constantly adjust to new information and reflect the true value of any assets.  Yet, sharp drops in stocks or house prices cannot be reasonably explained away with this line of thought.

The devastating effects of our emotions getting the best of us are evident in the wake of the global financial crisis.  Instead of ignoring base instincts, economists should be thinking of ways to rein them in.  One of the key ways for greed and fear to influence the economy is through the finance sector.   Banks are geared to generate as much borrowing as possible but their loans more often than not go toward speculative investments in property or stocks.  Such lending creates unnecessary instability with the economy as a whole suffering as boom turns to bust.

It is no coincidence that the worst recession of a generation comes at a time when the finance sector has grown to dominate many developed economies.  Limiting the scope of banks, with more rules following decades of deregulation, would be a good place to start improving the system.  Measures such as taxes on financial transactions would also take out some of the volatility from markets for stocks and bonds by pushing investors to take a more long term view.  Such policies may lead to higher fees for loans and lower returns from investing but the costs of continuing with the status quo will only mount up.  Better to save us from ourselves than to let our passions run wild and cause even more havoc.

Sunday, 27 April 2014

Economic Growth – Why good times never last

Central banks let the good times continue for too long and we are all paying a higher price as a result

Economic growth is like a party – the longer it continues, the more trouble is likely to ensue.  Investors, like partygoers, are likely to push the limits to make the most of the good times.  The longer this is allowed to continue, the greater the carnage that is likely to be left in the wake of the revelling.  Thus, it is not a coincidence that a period known as the “Great Moderation” has been followed by the “Great Recession”.  This is not the first cycle of boom and bust, but if it could have been predicted, why did central banks let things get so out of hand?

Theory behind boom and bust

The business cycle is a normal part of any economy.  The key driver of the cyclical nature of the economy is perceptions of how the economy will perform in the future.  Views about the economy change over time meaning that it is unlikely economic growth will continue at a steady rate.  This is because, when the economy is operating smoothly, confidence perks up.  Consumers will spend more and save less as worries about the future ease.  Greater spending by consumers will prompt companies to invest more due to expectations that their businesses will expand.

Optimism will also spill over into asset prices.  As prices for assets such as houses or stocks rise, the higher values attract more buying.  The hope of easy money lures in more and more buyers spurred on by the belief that prices will continue to rise.  Debt levels expand as consumers and businesses take out loans to take advantage of the economic growth.  Instead of this extra credit being put to productive use, it is easier to make money with speculative investments on property or stocks.  Thus, debt increases along with asset prices, each fuelling a rise in the other. 

This cycle inevitably gets out of hand as rising asset prices outpace the growth of the economy as a whole.  Prices reach unsustainable levels with the potential to trigger a financial crisis.  The cycle then goes into reverse with businesses slashing investment and consumers cutting back on spending.  The economy retrenches for a period as debt is repaid and asset prices fall back to more reasonable levels.  The harsher economic climate weeds out the weaker companies and business eventually picks up as the economy stabilizes again.  At this point, the party spirit returns and the business cycle begins afresh.

Economists make for bad students of history

The business cycle has been repeated throughout history but this is quickly forgotten when times are good.  Economists at central banks were patting themselves on the back for a decade or two of low inflation and steady economic growth which the previous head of the Federal Reserve Ben Bernanke labelled the Great Moderation.  Central banks thought they were keeping a lid on the economic boom time.  Interest rates were raised in an attempt to keep some semblance of order but hindsight has shown that this was insufficient.  

Everyone was getting too carried away with no one to rein in the revelry.  The indulgent ethos of the time was best captured by the head of Citibank who foolishly said in late 2007 that “as long as the music is playing, you've got to get up and dance”.  Central banks should have acted like police, stepping in to turn the music down, but were more like cheerleaders urging on the good times. Any Cassandras who prophesized the coming of the global financial crisis were marginalised as party poopers.

There was a line of thought that the financial markets knew best and central banks should just step in to clean up the mess when anything went wrong.  But letting the party go on for much longer than it should have done has only made the clean-up job that much bigger.  Even new tools are not proving much good in mopping up the aftermath.  If the partying had been cut short sooner, we would probably not be still suffering from the hangover.

Thursday, 17 April 2014

Greece – On the mend but still broken

The Greek government is selling bonds again but its debts require a further fix

Greece was always broken but it was not obvious until the Eurozone crisis.  With its increasingly shabby fa├žade finally stripped away, Greece's dilapidated economy was shunned by investors and needed to be bailed out - twice.  But, with help from others, Greece is on the mend and recent progress has been rewarded by the Greek government regaining the ability to borrow from financial markets.  While this is a key step in putting the pieces back together again, a big chunk is still missing.

Shoddy foundations

The Greek economy had never been on the firmest footing.  A raft of regulations sapped the dynamism of the economy, making Greece an alluring holiday location but an unattractive place to do business.  To avoid cumbersome rules, companies typically remained small and often hide out in the shadow economy.  This resulted in Greece being mired in low productivity and chronic tax avoidance.

Investors were willing to overlook all of this once Greece joined the euro.  Despite its obvious faults, Greece was treated as if it were the same as any other country using the euro.  This gave Greece access to funds at a lower interest rate, triggering a boom in investment in property among other things.  The government joined in and ramped up spending on the assumption that the good times were here to stay.

Yet, what was seen as a blessing at the time proved to be the wrecking ball that was to bring down the house.  Cheap financing dried up with the onset of the global financial crisis and the weakened economy collapsed under the weight of excessive levels of debt.  The government needed to borrow more and more as the economy sank into recession but investors were no longer forthcoming with their cash. 

With no one willing to lend to the Greek government, the IMF and others stepped in to prevent a default due to fears that other countries in Europe would be put in peril.  The result was a prolonged economic slump as Greece struggled with the aftermath of its borrowing binge as well as with austerity measures needed to shore up the government’s finances.  The situation was so bad that Your Neighbourhood Economist was one of many who thought that the Greeks would leave the Eurozone lured by the illusion of an easy way out.

Major repairs still needed

The economic stagnation in Greece has continued with six consecutive years of recession leaving GDP around 25% lower.  Forecasters are now optimistic enough to predict that the Greek economy will grow slightly in 2014 with austerity measures expected to ease as government finances improve.  Another sign of progress is that investors are again willing to lend the government money.  The Greek government sold 3 billion euros worth of bonds earlier in April offering a yield of just under 5% after yields spiked to over 30% around two years ago.

Investors are keen to snap up debt from other peripheral countries in Europe.  This reflects brighter prospects for some countries such as Ireland and Spain.  Yet, in the case of Greece, it is more a reflection of a dearth of other investment options offering similar returns and of investors being more willing to take on risks.  That Greece can sell bonds again is a sign that the Eurozone crisis is over but the Greeks are still left with the harsh reality of excessive debt.

Exacerbated by the sharp drop in the size of the economy, the debt to GDP ratio is around 175% and still edging upwards.  Considering that the Greek economy is unlikely to generate enough of a surplus to pay off this debt, another bailout has always been on the cards.  The Greek people are also unlikely to be able to live with the burden that this brings.  Until the shackles of debt are removed, the Greek economy will never be properly fixed.

Tuesday, 15 April 2014

Free Trade – Missed by Many

Free trade is a route to greater prosperity and better government but its biggest advocate has retreated from its crucial role

US foreign policy was something that people loved to hate.  America was portrayed as a global bully who pushed everyone else into playing by its rules.  The Iraq War is perhaps the most obvious example of this but the conflict also marked a turning point when the US started to withdraw from its dealings with other countries.  While this might appear to be cause for rejoicing, the retreat of the US from international affairs has left a gap that has yet to be filled.  A lack of impetus in the promotion of free trade is one key area where the world is missing the US in a way that is not yet widely understood.

More than just buying and selling across borders

Free trade is something that many people would be glad to see the end of.  It allows for greater globalization which has been vilified as costing jobs and hurting our economy.  Although a source of pain for some in the West, globalization has been a boon for most of us, providing a range of cheaper goods for everything from bananas to iPhones.  At the same time, export industries in less developed countries have pulled millions out of poverty.

Openness to free trade with the rest of the world involves more than just exporting and importing.  It is part of a bigger package that includes less overall regulation and more economic freedom.  This may not seem like much to those in countries that already have this in place, but to places under the rule of an autocratic government, it is something worth fighting for.  Such a battle has dominated the news so far this year as it plays out in Ukraine.

The protests that overthrew the oppressive regime in Ukraine were triggered by the government stepping back from an EU trade agreement and instead opting for a closer relationship with Russia.  This was taken to have the broader meaning that the Ukrainian government was choosing the autocratic style of government characterised by Russia rather than the democratic freedoms of the EU.  Yet, the unrest in Ukraine shows the preference of its citizens and how opening up to trade (and expansion of the EU) can spur on hearts and minds when seen as part of a bigger picture. 

Free trade can have a positive influence in other ways as in Japan.  Political lobbyists such as farmers have tended to block greater access for imports into Japan.  Japanese politicians are apt to side with such vested interests instead of with voters in general who would benefit from cheaper imports.  In the past, it has only been pressure from outside the country - typically from its main ally, the US – that has helped open Japan up to free trade.  Delayed but critical reforms needed to fire up the Japanese economy could be pushed through if a deal were to be done on the Trans-Pacific Partnership which is a free trade zone encompassing countries on the Pacific Rim.

China can only offer so much

The fight for free trade typically needs a champion.  This is because the negative impact of greater trade is concentrated in a few sectors which are proactive in their opposition.  The gains from more open borders are, on the other hand, spread out amongst us all, resulting in only weak support.  Thus, despite the substantial advantages of free trade, progress has been halting.  The problem is exacerbated by each country having its own boisterous domestic forces against free trade so that getting a large number of governments to sign up is a tricky proposition. 

The US government had been the driving force behind free trade, using access to its own lucrative domestic economy as a bargaining piece.  Rather than being a bully, the US spread economic freedoms through trade like a benevolent power.  But, the US no longer has the ability or willingness to play this role.  A rebalancing of the global economy means that the lure of the US economy pales in comparison with other countries such as China.  The weakening of its relative economic strength also means that the US is less generous in its bargaining with other countries.  This is reflected in the stalling of what was supposed to be the next big round of global trade talks which started in Doha in 2001.

The lure of Western ideals as embodied in free trade still remains.  Countries clamber to join the European Union despite its recent troubles.  Economic power may be shifting away from the US and Europe but their democratic style of government is still sought after by many (although politicians have not been showing themselves in a good light).  Free trade in itself is not the answer but it will help push many countries in the right direction. 

Tuesday, 8 April 2014

China and its growing pains

The Chinese economy is treated like a problem child by the media but does not deserve its bad reputation

Growing pains have led to a lot of bad press recently for both China and Justin Bieber.  The development of both has been closely watched for any signs they are going off the rails.  Bieber has been much maligned for bad behaviour as he shakes off a boyish image.  China has been the driver of growth in the global economy but may not continue to fulfil this role.  Just like Bieber, much of the new stories on China are negative but China is different in that it does not deserve the harsh treatment in the press.

Big trouble in little China?

Like a spoilt kid growing up in front of the media, a developing economy can always expect a few troubles along the way.  Even more so when every step is analysed in detail as has been the case with the once-in-a-generation rise of a new superpower (China, not Justin Bieber).  The Chinese economy always seems to be on the cusp of a breakdown according to many experts.

The current concern with China is the high level of debt amid a surge in investment.  Some of the money has gone into projects that have not panned out as shown by empty housing apartments and dodgy infrastructure ventures.  The bulk of wayward spending tends to turn up in out-of-the-way places, such as the far-flung regions of China.  Here, both private and public investment is driven more by politics than by financial fundamentals.

Local politicians need a growing economy to please their masters in central government.  Large building projects are a convenient shortcut to achieve this and banks can be cajoled into lending to maintain their political connections.  Banks have limited room to move in China due to regulations which limit the level of interest rates on savings.  This encourages savers to stash their money in what is referred to as the “shadow banking sector”.  These offer higher returns on savings and provide firms who are shunned by banks access to loans.  But being outside the normal banking system means that this sector is harder to keep tabs on and influence through policy.

Bigger worries elsewhere in the world

Talk of politicians pushing projects and shady banks does not seem to bode well for China, but its banking sector is likely to be no worse than Western banks.  Banks in the US pushed dubious mortgages throughout the global financial system during their own lending binge.  At least any direct ramifications of a banking meltdown will be mostly contained within China.  Yet, such worries fail to take into consideration one crucial factor – the controlling influence that is the Chinese government.

The government in China has both the willingness and the ability to step in and shore up the banking sector if required.  The Chinese government intervened with a massive fiscal stimulus in 2008 and 2009 as the global economy slowed.  In comparison, most Western governments only managed a half-hearted response to the global financial crisis.  A sluggish economy with high unemployment is not something that the Chinese government would tolerate as its own existence would be under threat.

Another positive for China is that any potential problems with its banking sector are not symptomatic of bigger issues.  The financing for debt in China does not come from overseas but through China’s own reserves.  Neither is the surge in investment causing the overall economy to overheat as evidenced by subdued levels of inflation and a relatively low volume of imports.  The contrast with countries making up the “fragile five” could not be starker.  China is likely to ride out any bumps in the future as it develops but the same may not hold true for the turbulent career of Justin Bieber.

Monday, 7 April 2014

Bitcoin – Geek’s Gold

Geeks use technology to make things better and may be close to coming up with a better form of money

The rise of Bitcoin has been as meteoric as its price.  Your Neighbourhood Economist had dismissed the phenomenon as a fad but decided to take more notice after even my recently retired father showed an interest.  The best way to describe Bitcoin to my father was like geek’s gold – a new form of money for techies who no longer trusted traditional forms of money (even though there are other reasons for holding bitcoins).  Bitcoin’s surge in popularity is a sign of a new era of abundant computing power coupled with feckless printing of new bundles of regular cash.

Bitcoin is a type of digital money where each bitcoin is a piece of complicated computer code.  The Bitcoin system operates so that bitcoins only increase at a fixed rate – new bitcoins are given to individuals who maintain a gigantic ledger which keeps tabs on the entire history of all bitcoin transactions.  This setup allows for a public record of transactions to ensure that nothing goes awry while allowing access to bitcoins without going through a central dealer.  This is all made possible through the freedom of the Internet and masses of computing power.

Boom and bust of a gold rush

The key to forming any new currency is that people believe in it as something of value.  A bitcoin was worth less than one dollar in early 2011 before a steady rise to just over 10 dollars by the end of 2012.  It was in 2013 that the price of bitcoins exploded, reaching a record high of 1,242 dollars in late 2013.

One reason behind the dramatic rise of Bitcoin has been that it is relatively difficult to track down the individuals who use it.  Users are known through a Bitcoin address which allows for a high level of anonymity compared to a bank account.  This aspect of Bitcoin makes it popular with those who obtain cash through dubious sources and wish to remain undetected.  Once Bitcoin had shown that it could at least hold its value (with a steady, if not rising, price), it attracted the attention of people with money to hide.

The relatively long period (in terms of technology fads) during which the price of Bitcoin rose sparked a surge in interest from speculative investors.  The quest for a quick buck lifted the price for bitcoins beyond what was sustainable with bitcoins trading below 500 dollars in early April.  Bitcoins are likely to continue to have a volatile price but the price variability will probably decrease over time as bitcoins are used in more transactions.

Money doesn't grow on trees

The key driver for interest in Bitcoin is as an alternative to the normal notes and coins type of money.  The relative ease and lower costs of online transactions make it popular with people that buy and sell via the Internet.  However, Bitcoin has been thought of as something more.  At a time when central banks are printing a deluge of new cash, Bitcoin is seen as a form of money that is not overseen by a profligate governing body

The number of bitcoins can only increase by a fixed amount over time whereas it is possible for a virtually endless amount of notes and coins to be produced.  For techies that are always dreaming up new and better products, the case for a new type of money must have seemed a no-brainer.  Limited and always sought after, gold has typically been the main option for investors worried about excessive expansion of the money supply.  In this way, Bitcoin could be considered gold for geeks.

While gold is an out-of-date (but still valuable) form of money, Bitcoin is a potential model of how money might be in the future.  Despite only being accepted in a few offline locations, over-the-till payments with bitcoin are now possible using mobile phones.  So digital currencies could become commonplace although Bitcoin itself may not last the test of time.  A limit to the eventual number of bitcoins could prevent its spread into the mainstream.  Yet, alternatives may be created to build on the concept. 

It just remains to be seen whether digital currencies will be the latest tech fad to go from geek to global. 

Thursday, 3 April 2014

Tax Hike in Japan to test fight against Deflation

The Japanese government has been proactive in its battle with deflation but higher consumption taxes will show how much progress has actually been made

There is a big test coming up for the Prime Minister of Japan, Shinzo Abe, and his own brand of economic policies which have been labelled “Abenomics”.  Abe has launched a range of aggressive measures to end deflation and get the Japanese economy moving again.  However, a rise in the consumption tax from 5% to 8% in April will provide a thorough examination of the economic recovery in Japan.  The results will matter not only for the long-suffering Japanese citizens but may also provide crucial lessons on how to combat the growing threat of deflation.

Economic Policy - could do better

A report card for Japan's Prime Minister might see him get an “A” for effort but a “C” for execution.  Abe has had a busy first year in power and has attracted plaudits for his three arrows of economic policy encompassing fiscal stimulus, monetary easing, and structural reforms.  This has translated into 10.3 trillion yen (or around US$100 billion) in extra government spending and the Japanese central bank aiming to double the money supply over a two year period.

Hopes were buoyed as the Japanese economy perked up in early 2013 while the stock market in Japan was one of the best performers last year.  Unfortunately, Abenomics did not live up to the hype with economic growth slowing and many investors selling their Japanese shares in 2014.  The shortfall against expectations has been due to an unwillingness to push through the reforms which are key to getting the economy moving again.

Your Neighbourhood Economist had always been sceptical about the outlook for the reforms as Abe is a conservative in a political party which is known as a bastion of old-school traditions in Japan.  The Japanese government is not alone in using expansionary monetary policy as a shortcut to improving the economy.  Yet, two decades of stagnation show that there is no easy route to scoring good marks where the economy in Japan is concerned.

Economic recovery put to the test

The hike in the consumption tax (which has been on the cards for decades) is a move to sort out the government finances but threatens the goal of defeating deflation.  Consumer prices have begun to edge upwards but this depends on the central bank in Japan continuing to print a torrent of new yen notes.  Rising prices are a novelty in Japan after decades of deflation with the higher consumption tax set to bump prices up a further notch.

It is not clear whether Japan is ready for this real-life lesson on the effects of inflation.  Many companies in Japan are not yet convinced that inflation has taken hold with some even lowering prices to absorb the higher taxes.  As a result, wage gains have been timid despite the government's efforts to bully Japanese firms into paying their workers more.  Inflation without higher wages is even worse than deflation as consumers increasingly feel the pinch.  The increase in consumption tax could exacerbate this trend and depress spending.

Little to learn

A poor showing in economic policy in Japan will seldom make the news elsewhere but it does not bode well as other places look set to face a similar set of problems.  The causes of deflation in Japan are becoming more prevalent in Europe – high government debts, an ageing population, a stagnating economy, and companies struggling amid globalization.

Lessons learnt in Japan could be applied elsewhere.  Yet, successes have been few and far between.  Japan does not make a good case study for fiscal stimulus (more due to problems within Japan rather than problems with the idea of a stimulus).  Neither has monetary policy had much impact with an increase in the supply of money only having a limited effect on inflation (due to the link between money supply and inflation being weaker than assumed).  Europe is instead contemplating negative interest rates which is something that Japan has not tried.

Too much inflation will drag down the grades of central banks but deflation could earn them a fail.  Part of the reason is that deflation has been seen as a cause of the malaise of the Japanese economy (even though deflation is more likely just a symptom).  If the Japanese economy could return to being the star pupil it was in the 1980s, deflation would no longer come with such a bad reputation.

Tuesday, 1 April 2014

Interest rates - how not to manage the money supply

How central banks thought they had slain the main threat to the economy but the real menace was lurking elsewhere

Economics is a narrative on how the economy is supposed to work, but the path to economic success and riches is often fraught with danger.  The cautionary tale of interest rates and money supply serves as one such example.  The hero of the story was meant to be central banks whose role was to control monetary policy which involves looking after the amount of money in the economy.  Interest rates were deemed the best weapon to regulate the money supply and a couple of decades of success ingrained a belief in this view of the world.  However, the global financial crisis put an end to hopes for a happy ending and economists are still struggling to come up with a new script.

What was supposed to happen

The original scenario relied on central banks being able to influence the money supply by setting interest rates to the appropriate level.  Central banks would not target money supply directly but focus on inflation instead.  Economic theory states that inflation is the result of an expanding amount of money in the economy.  More money equals higher prices.  So, if prices are rising too fast, this is due to an excess of money in the economy.  Higher interest rates act as a damper on inflation because the amount of money moving around the economy drops off as the demand for loans falls and consumers leave more cash in the bank.

The focus on inflation also stemmed from its leading role in telling how well the economy was doing.   Inflation has gotten out of hand and wreaked havoc in the past so economists are determined that this storyline was not to be repeated.  Inflation is also easy to keep tabs on compared to money supply which is tough to define, let alone measure (the money supply could include cash as well as money in banks (current or savings accounts) and other funds).

All good in theory.  And it even worked in practice for a couple of decades from the late 1980s.  Economists thought that their ideas had enabled them to conquer inflation and smooth out the boom and bust cycles.  But all of the good work of economic policy was undone due to an inherent flaw in the theory.  Growth in money supply not only affects consumer prices, which central banks watched over-closely, but also in asset prices, which were not seen as a concern.

Need for a new narrative

It is no surprise that the villain in this story is the banking sector.  Banks were left in charge of setting the money supply which rises and falls depending on the amount of lending.  The volume of loans (along with the money supply) exploded during the favourable economic conditions over the years leading up to the global financial crisis.  Banks were able to take advantage of the growing demand for credit due to innovations in finance that meant that banks could pass loans onto others and not have to worry about loan repayments. 

A large portion of the loans was used to buy existing assets such as houses or shares.  The resulting gains in asset prices, which surged ahead of growth in the underlying economy, sowed the seeds for the crisis to come.  Meanwhile, a dramatic increase in global trade meant that inflation was no longer determined in the domestic economy but was highly influenced by global markets.  Cheap imports from China reduced the prices of products like clothes and electronics.  Imports were also on the rise and the prices of any internationally traded goods no longer depended on the money supply in any one economy.

Subdued inflation meant that the results of the rampant increase in money supply did not jump out at central banks.  Their focus on consumer inflation led central banks to disregard the asset price bubble growing in their midst.  Instead, it was argued that financial markets would always set the appropriate prices and that central banks should not get involved.  The irony is that any extra cash tends to influence asset prices even more than consumer prices (as shown by the effects of quantitative easing) but this effect is near impossible to separate from other factors (hence the reliance on inflation).

It was revealed that central banks had been setting interest rates too low to keep the economy from getting into trouble.  The whole messy chapter could have been avoided if the money supply had been kept under control.  A simple solution would be for the economy to be left to its own devices with a relatively stable money supply.  Greater demand for loans would push up interest rates, stopping debt levels from becoming excessive while also benefiting savers. 

Despite the obvious solution, economists are loath to give up on the fairy tale they always believed would come true.  It may take time for a new economic story to be written but the changes should mean a brighter turn in the future of the economy.  With this, at least the sobering ending to the latest chapter of the economy should come with a silver lining.