From the Author
The world economy underperforms despite massive attempts at stimulus. Governments' and central banks' have the wrong policies because they do not understand today's problems. Those who advocate stimulus, whether fiscal or monetary, assume that the problems are cyclical and thus temporary. But recovery in Japan, the UK and the US is inhibited by structural problems, which will not be solved by trying to boost demand.
In the UK and the US there has been a major change in the way corporate managements are paid and thus in their incentives. Changes in incentives naturally change behaviour, but the governments, central bankers and the economists from whom they take advice have failed to understand this. The new incentives have changed the risks that management takes. Pricing has become more aggressive and investment scorned, both of which increase long-term business risks at the expense of short-term profits. This has pushed up profit margins and inhibited spending on new equipment. As a result companies run persistent cash surpluses, and budget deficits have risen to prevent these surpluses from causing depression. Japan has a similar problem and, while the cause is different, it is equally misunderstood.
Deficits cannot be reduced until corporate cash surpluses turn to deficits and current policies will not achieve this.