Summary: A powerful metaphor, widely used, about this recession — the worst since the 1930’s — providing important insights.
Excerpt from “Financial Heroin”, Don Coxe, Coxe Advisors, 16 December 2009:
… my father was a doctor in the Canadian Army in WWII, and served in the Italian campaign. He became greatly respected for his anaesthesia and pain management under battlefield surgery and rehabilitation conditions. (He was cited after war’s end for perhaps having performed more anaesthetics under such conditions than any other Canadian doctor.)
In discussing his experiences, he told me that he swiftly learned that the best — and frequently the only — reliable drug for the critically wounded was heroin. Soldiers who writhed in agony under other medications almost always responded to heroin. The problem wasn’t deciding whether to administer it: if morphine didn’t work fast, you didn’t waste time, you injected heroin.
The problem for the doctor came when the patient had begun to recover from surgery, and was receiving heroin. How quickly could the dosage be reduced and when would it be terminated? Although few soldiers were freed of heroin without experiencing pain and distress, it was necessary to take the drug away as rapidly as possible. Otherwise they would become addicts and their lives would be ruined — for soldiering and everything else.
… Zero interest rates are Financial Heroin.
This goes to the vital points, mostly misunderstood, about the massive fiscal and monetary stimulus governments have applied in response to this global recession. Government stimulus has several characteristics similar to heroin.
- It mitigates the downturn, minimizing the suffering,
- but it does nothing to fix the underlying problems,
- and creates imbalances which must be removed when the economy recovers.
About government stimulus programs
(1) The miraculous curative properties commonly ascribed to government stimulus results from the brief duration of most recessions. They last a year or so, with government programs enacted in the middle — after the worst, after which signs of recovery soon appear. Sometimes the stimulus programs get enacted as the recession ends — or even during the early stages of the recovery.
(2) When the private sector has underlying problems so severe to prevent normal recovery — as in the Great Depression, Japan since 1989 — then the stimulus programs are seen in their true light — useful palliatives, not magic bullets.
(3) A recession provides a unique opportunity to take important public policy measures, such as tax changes, regulatory reforms, and construction of valuable infrastructure projects. The US has so far wasted this opportunity. Let’s hope the recession does not continue into 2010, and give us another opportunity for such things.
Originally published at Fabius Maximus and reproduced here with the author’s permission.