US Fed Governor Kevin Warsh is one of the few policymakers to focus on reality rather than wishful thinking.
He pointed out nearly 3 years ago that liquidity should not be mistaken for capital, although others continue to ignore this uncomfortable fact.
Now, in advance of tomorrow's G-20 meeting of the world's richest economies, he delivers a stinging critique of current policies and argues, in the Wall Street Journal, that the key issue is the need to "improve our policies".
"Broad macroeconomic policies have not changed direction in the past several years. But change they must if we are to prosper. We can no longer afford to tolerate economic policies that are preoccupied with the here and now. Chronic short-termism in the conduct of economic policy has done much to bring us to this parlous point.
"Since early 2008, the fiscal authorities have sought to fill the hole left by the falloff in demand through large, temporary stimulus--checks in the mail to spur consumption, temporary housing rebates to raise demand, one-time cash-for-clunkers to move inventory, and temporary business tax credits to spur investment."
"Fiscal authorities should resist the temptation to increase government expenditures continually in order to compensate for shortfalls of private consumption and investment. A strict economic diet of fiscal austerity has greater appeal, a kind of penance owed for the excesses of the past. But root-canal economics also does not constitute optimal economic policy.
"The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards."A year ago, after the G-20's last meeting in Pittsburgh, USA, the blog took strong issue with the self-congratulatory mood. This time, it fears 'beggar-my-neighbour' policies are inevitable, if participants don't raise their game.
Or, as Warsh warns, "heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery."