In an article entitled “The Stimulus Scam”  by Antony P. Mueller,  the author points out the unreliability of using the GNP as a tool for determining the sate of the economy. Mueller claims that despite the reports that the GDP is rising, the world economy is actually contracting due to a poor outlook on long-term production. 

            Private credit spending is included in the GNP as is government stimulus. Keynesian economic models look at demand, while Austrian models rely upon production of supply to reach conclusions about the strength of the economy.  A typical Keynesian type like Paul Krugman would look at the GDP increase and say that the economy is recovering; and if it is recovering too slowly, then more government spending is the cure; whereas, the Austrian would look to see that production has diminished and say that the economy is failing.

            I think both schools would agree that what is necessary for sustained growth and wealth is private industry. The Keynesian might consider the service industry to be important whereas the Austrian would like to see greater production of goods than services.

            The Austrian would say that the problem with stimulus packages is twofold. First, when the money runs out, the benefit ceases; secondly, the allocating resources to stimulus projects limits investment in private enterprise, or as the Austrian would say, stimulus creates a “malinvestment”.

            The effect of pumping stimulus dollars into the economy according to the Austrian would tend to inflate prices since commodity production has not increased the supply to meet the increased supply and velocity of money.  While the stimulus may succeed in calming a minor recession, a continued decline in production will necessitate greater inputs by way of fiscal stimulus until at some point a downturn becomes unavoidable and the final result is that the economy will suffer an even greater collapse than if left alone to allow reallocations of resources in the early phases of an economic decline.

            Since one of the tools that the Keynesian model employs is the manipulation of interest rates to control the supply of money, once the interest rate is reduced to zero that tool can only be used to further restrict the money supply by increasing the rates, and if a greater supply of money is actually needed, other tools are necessary.  

            The Whiskey-Zulu tool, a term apparently coined by Vox Day in his book “The Return of the Great Depression”, refers to the hyperinflation of the Weimar Republic and Robert Mugabe’s Zimbabwe futile attempt to reinflate a burst asset bubble. In the end running the printing presses is the tool of last resort to avoid defaulting on government debt.  While the current global economic crisis for Americans became evident to them when the housing bubble collapsed, the scope of the problem is much more widespread and global, and is the result of seventy years of debt financing.  According to Day using the relative size of global debt and contractions, this economic decline will exceed the decline of the last Great Depression of the 30ties.  Both Day and Mueller agree that the formation of unsustainable levels of debt and of excess reserves in the banking sector could explode into a surge of inflation.

            If we look at demand, certainly given the global economy, wherever dollars are held they have the potential of increasing the velocity of money which is one of the factors to be considered in predicting an inflationary economy; however,  if we look at the problem from the demand side only, and we say that given the level of private debt, unemployment and other factors globally, we might be looking at deflated instead of inflated prices. The question then becomes who has the resources to produce less expensive products?  How are the prices of higher order capital goods affected? Will worldwide demand fall equally, or will there more likely be an imbalance among the industrialized nations and therefore unequal supply of commodities?

            No one really knows that answers to these questions even though so-called experts assign numbers to their predictions, which usually prove to be inaccurate and sometimes are completely wrong.