The first, and most obvious reason is simply that conditions can change. Quick action taken by the authorities can, at the early stages of a downturn, change the course and depth of a recession.

Unfortunately for us though, the authorities don’t actually know what steps to take.

This is due to the current macroeconomic playbook on economic intervention being conceived entirely from a central-bank-centric perspective. In this worldview, central banks are omnipotent and sit at the center of the financial universe.

However, this is based on a false paradigm, and simply isn’t true.

Banks sit in the middle of the financial system, and are the ones who actually create money, not central banks.

All central banks (in their current form) can do, and all they have been doing over the past 14 years of crisis management, is print bank reserves. But bank reserves are not money that flows into the economy, simply because they aren’t lent out.

The earlier real money, that is not bank reserves, gets pushed into the economy, the lower the probability of a deep and prolonged recession.

In terms of governmental intervention, this real money can take two forms.

The first is fiscal stimulus enacted through legislation, like those passed in 2008, 2009, and 2020, which pumped trillions into the US economy.

Fiscal stimulus is real money due to the fact that cash is transferred directly into citizens’ bank accounts. The government does so by taking the funds from somewhere else, either from the country’s savings (fiscal or other kinds of governmental cash reserves), or by borrowing.

However, fiscal stimulus won’t be very effective in times of great uncertainty, simply because folks must be willing to spend their stimulus money instead of saving (hoarding) them.

After all, would folks spend their stimulus check if they’re out of a job, or uncertain that they will keep their current ones? It is more likely that they would save the money to spend on bills and essentials rather than splurge on big ticket items.

Moreover, checks from the government aren’t a sustainable solution, as folks can’t go to a bank and get loans with them. In order to do so, they need an income, which means jobs, which means bank lending to support the creation and operation of businesses.

To be continued…