Difficult to invest way out of gloom

Nick Clegg, Deputy Prime Minister, is expected to tell his party conference today that Britain can invest its way out of the downturn.

However, it is proving difficult to identify projects that can be started quickly, and the government is hampered by its need to cut spending on existing activities.

At the same time the IMF is saying that the global economy has entered a “dangerous new phase.”

Is the way forward through fiscal tightening (which worked for Brazil in the early 2000s, but then Brazil had a booming global economy to export into, and the opportunity to depreciate its currency — both of which Greece does not)? Or is the solution to take on more debt? Well it might be, but only if that debt is spent on activities that generate a virtuous circle of self-sustainable future growth. (Sustainable, that is, in a purely pragmatic sense — not in the green sense.)

It is hard to see how to break out of the vicious circle of ‘difficult situation –> spending cuts –> impossible to spend on new projects –> tax revenues fall/stagnate –> difficult situation’.

Like the frog in the saucepan, we risk being boiled alive if we do not jump.

What would ‘jumping’ look like here? It would mean recognising that the world has changed, a turning point has been reached, the future is not going to be like the past. And then instead of evolving forward from where we are now, the strategy could switch to creating a future that we want to move to, and then building a plan to get there.

That is unlikely to happen for the next couple of years, unless a single catastrophic event shows clearly that the world has changed and their old mental models/paradigms no longer hold.

But in a world that collectively is entering a “dangerous new phase”, it is no longer possible to rely on exports to solve the problem — there is nowhere outside the global economy to export to. Neither is there anywhere outside the global economy to depreciate our collective currencies against. The Earth is full and the globalisation project is shifting to its next phase. Change is not always easy.

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