John Overmyer

The Price of Inaction

Are the world’s governments capable of keeping the world economy out of a deep and long depression? The problem is not that governments are unsure about what to do, but that that investor demand for safe, secure, and liquid assets – and thus their value – is too high, while demand for assets that underpin and finance the economy's productive capital is too low.

BERKELEY – Are the world’s governments capable of keeping the world economy out of a deep and long depression? Three months ago, I would have said yes, without question. Now, I am not so certain.

The problem is not that governments are unsure about what to do. The standard checklist of what to do in a financial crisis to avoid a deep and prolonged depression has been gradually worked out over two centuries: by Bank of England Governor Cornelius Buller in 1825; by the Victorian-era editor of The Economist , Walter Bagehot; and by the economists Irving Fisher, John Maynard Keynes, Milton Friedman, among many others.

The key problem in times like these is that investor demand for safe, secure, and liquid assets – and thus their value – is too high, while demand for assets that underpin and finance the economy’s productive capital is too low. The obvious solution is for governments to create more cash to satisfy the demand for safe, secure, liquid assets.

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