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Edmund Phelps, Nobel laureate, on Bloomberg stated: “There are signs that the economy has lost its dynamism, its urge to innovate, or its ability to innovate.” His observation is early for conventional economists, most of whom insist that a recovery is underway. His observation is mostly unrecognized, but will become standard wisdom over the next few years.
The economic problems started back in the late 1970s as did the credit expansion. Consumers were able to borrow and spend their way to a false prosperity. That covered up much of the economy’s internal weaknesses over the past three decades. Now debt levels are well past their sustainable levels. The debt process is reversing; consumers are deleveraging and spending much less than their incomes might suggest. This process will go on for years. Our standard of living is declining and will continue to do so for the foreseeable future. Some of what is seen as deflation today is actually this decline in living standards.
Phelps recognizes that there is little that the government can do about this and recommends that stimulus cease. Continuing to spend only increases the size of government and ensures that our future will be less comfortable than our past. As government grows, our economy becomes more similar to the sclerotic, anemic economies of Western Europe — low or no growth, no job creation and continual under-performance. Despite government policies, we will emerge from this crisis. But we will look less like United States and more like France.
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