During the dark financial days of late 2008/early 2009, few economic or political commentators questioned the need to reign in the massive stimulus packages being enacted all around the world. Private demand was falling off a cliff, business investment had ground to a halt and even that engine of export growth, China, looked set to slow down.

In this environment it made a great deal of sense for national governments to expand budget deficits, go into debt and spend, spend, spend.

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The Rudd Government economic stimulus packages have created considerable public policy debate as to their efficacy in restoring confidence and maintaining the level of economic activity. As Andrew Leigh has pointed out in his blog, this is not a question that can be resolved purely by reference to economic theory as competing theoretical models provide different predictions as to the outcomes. Thus this is a question that has to be resolved empirically (and given we live in an empirical real world it is more interesting to resolve that question there, rather than in abstract theory).

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I’m not a politician, nor an economist, but lately I feel qualified to stave off a financial crisis.  Hand out money and people will spend it. Is it that simple to fix an economy?

Well, maybe if people actually spend the money and on the right things. But what if they don’t follow instructions? Some commentators argue it doesn’t work anyway, others think it is just a band-aid solution while the real critics argue that in the long run it will make matters worse.

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The recent recovery is the result of money printing and once again easy monetary policy by central banks. The problem is that this type of monetary policy doesn't create real growth and eventually leads to asset deflation, so commodities including gold and stock prices will fall. However central banks will add further stimulus which will cause rising inflation and then a rise in the gold price. If stock markets begin to fall again and the $US rises, then gold may well fall back again after recently breaking the highs and then rise substantially beyond the $1,033 level.

It was reported in The Australian Financial Review 21/9/09, “But other economists are expected to warn the Senate today that the fiscal stimulus did not prevent a recession and could in fact prolong the domestic downturn in the way similar measures did in the Great Depression and in Japan during the 1990’s.”

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