FT: IMF urges eurozone to boost spending to fuel economic recovery

In this article from the Financial Times we learn that the International Monetary Fund (IMF) is recommending: 

“Eurozone countries should increase government spending by an extra 3 per cent of gross domestic product over the next year to mitigate the economic impact of the coronavirus pandemic…’As monetary policy — close to the effective lower bound in several economies — becomes less effective in boosting output, fiscal policy needs to play an increasingly larger role,’ the IMF said. ‘Fiscal measures to stimulate investment and to facilitate job creation and reallocation would speed up the recovery.’”

This is the essence of Keynesianism, whereby the belief that government spending is the panacea against market corrections – which in fact in this case was the creation of government policy. In Europe, like practically all over the world, the economic mess they find themselves in is purely self-inflicted. The current economic malice was not strictly due to the Covid-19 virus, but rather from the draconian economic lockdown policies enacted and enforced by government. One can argue that the government policies have affected more people than the Covid-19 virus will ever have. 

The fallacy of Keynesianism is the belief that spending begets wealth. Who would ever tell anyone that in order to prosper they need to spend? That’s right, no one! Saving and investment are the key to accumulating wealth. Using the flawed IMF logic, why stop at “extra 3 per cent”? Why not extra 4 or 5, 6, heck, why not 20 per cent extra? 

Government spending to cure economic malice is at best a short-term play. Ultimately, the economic forces will converge and clear the excess at fire sale prices – which is another way to say, an economic correction.