Further fiscal and monetary stimuli will not help. Best to be patient

When aggregate demand in a county collapses, we know what to do. We turn to the Keynesian identity which exhorts governments to spend more money than it gets by way of revenue to restore demand. 

When aggregate supply in a country collapses because of a war in the supplying country, we again know what to do. We urge governments to create more domestic capacity in the long run and diversify the sources of supply in the short run. 

But what do you do when not only do both aggregate supply and aggregate demand collapse simultaneously, but also that it happens globally? 

The thing is this folks: no one knows what to do.

It’s what is called a black swan event, completely unexpected. Everyone knows such things can happen but a black swan event is so rare that everyone believes that it won’t. 

And that’s what what China has wrought on the global economy. It has stopped it suddenly. The world economy has sailed into the doldrums.

What we have today is the exact counterpart of the doldrums. This is a nautical phenomenon when the wind dies down completely on the high seas. It’s the opposite of a gale. 

In the old days, when there were only sailing ships, if the wind died suddenly, the ship would come to a complete halt. This could continue for days and sometimes even weeks.

There was no human power that could move the ship. Indeed it is this phenomenon that inspired the lines in sailors song, “when the wind didn’t blow and the ship didn’t go, they called Carter the farter to start her”. It wasn’t much of a stimulus. 

This is why we can safely name all finance ministers and heads of central banks Carters. They can huff and puff but it’s not going to make the ship go. 

That’s why I think it’s not very clever to ask for ‘stimulus’ packages. What are you going to stimulate? Demand or supply or if you are very brave, both? How?

You can drop interest rates to zero or nearly zero. But how will you make people borrow? Some will, of course, but the increase in credit will be nowhere near what’s required.

You can go for massive deficit financing and cut tax rates but to achieve what, other than the creation of medical facilities and their consumption? That’s needed for sure but will it count as a stimulus? 

It’s the good old Carter problem. Whatever you do, it’s not going to make any immediate difference.

For that we have to wait for the winds to blow again. All other activity will be futile.

That’s why I think what the government has done so far is enough for the time being. It’s money well spent on very well focused objectives 

It can do some minor tweaking here and there but that’s all. We should be patient and let the worst of the virus be over. 

It might be hard to accept, especially politically, but knee-jerk fiscal and monetary stimuli will not help anything except a political purpose. That has been served by the clever adoption of the suggestions made by our Jesuit economists. 

Now we must all do what sailors used to do when their ship was stuck in the doldrums. Wait.