Thursday, April 23, 2009

Sanity Under Pressure

German chancellor Merkel rejects new stimlus programs as ecnomic data worsens.

"Chancellor Angela Merkel stood firm in rejecting any new German economic stimulus program even as the International Monetary Fund said the recession is worse than previously thought and called for measures to spur demand."

Merkel shrugged off calls for more spending despite a report by Germany’s leading economic institutes which will show tomorrow that Europe’s biggest economy may shrink as much as 6 percent this year -- almost three times the contraction of 2.25 percent forecast by the government in January.

The coalition won’t expand its 82 billion euro ($107 billion) stimulus agreed under two separate programs, Merkel told reporters in Berlin today after a meeting with business leaders and economists. “We shouldn’t talk about a third stimulus package,” Merkel said. “Instead we’ll let current measures take effect.”

While I don't agree with the reasoning behind rejecting more stimulus, I do agree with the action itself. What the IMF and Keynesian economists fail to realize is that there is infinite demand. The problem is not that there isn't any demand, but rather that there aren't the resources to fulfil that demand.

I have demand for a Ferrari, but the lack of financial resources prevent me from making such a purchase. If the government wants me to fulfill my demand for a Ferrari in order to 'grow' the economy by stimulating jobs associated with Ferrari production, the stimulus money that it uses to fulfill these demands must come from somewhere, or more specifically, someone. That someone is a group of people called wage earners who will subsequently be taxed to pay for my new Ferrari. And if there's not enough money coming in from taxes, the rest can be procured by inflating the money supply.

The opportunity costs that arise from distribution of wealth and manipulation of currency, as well as the distortions created to natural supply and demand of goods and services, will, at best, act as a road block to an economic recovery.

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