TODAY’S GREATER DEPRESSION HAS MANY DEEP CAUSES
Slowly rising consensus: in some important ways (evolution of relative GDP; employment rate; public investment; education’s relative performance), the economies of the leading countries are doing worse than during the “Great Depression” of the 1930s.
That’s why I prefer the expression “Greater Depression” to “Great Recession”.
And we have seen nothing yet: the cause of the “Greater Depression” of the 1930s was a chain of errors, which were easy to avoid.
(First a splurging in the 1920s, especially in the USA and Britain, and its unavoidable attending crash compounded by the American Senate’s arrogance that the international economy could be tweaked through tariffs, to profit only the USA, the whole thing followed by collapse of international trade and then by “liquidating everything” (as was said at the time).)
Thus, the roots of Depression of the 1930s were shallow, easy to avoid next time: avoid splurging, keep international trade going, use public money to avoid 9,000 bank failures (in the USA alone), and institute a FDIC (Federal Deposit Insurance Corporation: Europe’s “Banking Union” is trying to mimic that).
There are serious problems now, much more serious than in the 1930s. Including a lack of seriousness.
Serious reasons for collapse were during the long decline of the Roman Empire, or shortly after 1300 CE, when entangled ecological, climate, demographic, and plutocratic crises, with an attending plague, combined to kill half of Europe, and brought five centuries of war.
Indications are that the world economy, having not really recovered from the 2008 crisis, is stumbling. Especially Europe. Population: more than 750 million (EU + Russia, etc.).
Why? Why not?
In the 1930s, the government of the USA, first under Hoover, and then much more spectacularly under Roosevelt, starting in 1933, made Herculean efforts (in public spending, and legislation). Nowadays, it’s quite the opposite.
Paul Krugman suggests that righteousness is the cause of this decline: see the obstinate Merkel, and the refusal to do away with high debt levels.
In “Revenge of the Unforgiven. How Righteousness Killed the World Economy”, Krugman observes that:”.now [world] growth is stalling, and the specter of deflation looms.
If this story sounds familiar, it should; it has played out repeatedly since 2008. As in previous episodes, the worst news is coming from Europe, but this time there is also a clear slowdown in emerging markets – and there are even warning signs in the United States, despite pretty good job growth at the moment.
Why does this keep happening? After all, the events that brought on the Great Recession – the housing bust, the banking crisis – took place a long time ago. Why can’t we escape their legacy?
The proximate answer lies in a series of policy mistakes: Austerity when economies needed stimulus, paranoia about inflation when the real risk is deflation, and so on. But why do governments keep making these mistakes? In particular, why do they keep making the same mistakes, year after year?
The answer, I’d suggest, is an excess of virtue. Righteousness is killing the world economy.”
Notice that brandishing righteousness diverts attention away from full blown viciousness (which I believe is dominant). Then Krugman presents a small fraction of the problem, affecting to believe naively that high debt is the cause of everything:
“What, after all, is our fundamental economic problem? A simplified but broadly correct account of what went wrong goes like this: In the years leading up to the Great Recession, we had an explosion of credit (mainly to the private sector). Old notions of prudence, for both lenders and borrowers, were cast aside; debt levels that would once have been considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But my spending is your income and your spending is my income, so when everyone tries to pay down debt at the same time, you get a depressed economy.
So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt.”
This is a solution I have advocated since 2008. See “Reforming World Finance”, from November 2008, when I naively still hoped my friend Obama would grab the bull by the horns, as if he were courageous, or something. None of these obvious reforms was implemented, but at least now an economy Nobel was given roughly in this direction (see yesterday’s essay).
The 2011 version is: “To Save The World, Please Default (And Grab Capital From the Conniving Plutocrats)”
Iceland and Greece did write-off some debt. They had no choice.
However, debt forgiveness is only part of the problem (Oh, by the way, full disclosure: I have zero debt, so if I were biased, it would be the other way!)
The nature of the old debt, and the nature of the new debt are the core problems.
Debt because housing prices are through the roof comes from lack of building. Debt because of enormous leverage by public-private banks and companies involved in financial horror to steal We The People, is still something else.
The erroneous nature of the debt has misaligned the entire economy. We live in a world where there are master sommeliers. And where millions of people are tickled pink by the idea of being waited by a master sommelier, somebody who can look through a bottle thanks to the light of a candle, he expertly lighted, to stop exactly before the deposit at the bottom gets into the clear wine.
But then there was not enough money, or interest, to invent an ebola vaccine. Civilization is drunk, Bacchus is god, and Death invited to the party.
The entire debt machinery is stuck. Banks have lent to financial conspirators for decades, and are still doing it ever more. This sort of debt ought not to exist. (Bankers have been conspiring to steal on the currency markets, the administration of the USA claims to have just discovered, hinting that this time some bankers may be prosecuted personally. Maybe. Perhaps. We will see. But that sort of outright criminal activity is different from stealing by giving money only to one’s friends and c-conspirators.) What is needed for civilization to survive, is debt that brings new high Return On Investment for We The People. That could be new tech, or new housing, new, sustainable energy sources (my eye being on thermonuclear fusion, a field where power is growing according to its own “Moore Law”, that means, exponentially; to provide clean BASE energy). Plutocracy naturally is not interested by We The People flourishing. Just the opposite: Pluto thrives on misery. That’s the part of the economy which no one very serious, and part of the oligarchy, wants to see.
Even normal people do not want to see it: it’s too depressing, and they don’t know what to do.
Moreover plutocracy is entangled with a more far-out explanation of the present economic distress: the world is getting old, as the Romans used to say. The Romans needed to transit from the old economy, to a new one. As we do. Paralyzed, mesmerized and occupied by plutocracy, the Romans could not even conceive of the notion (all the more as some zones of the empire, especially in the Orient saw their GDP climbing all the way until the barbarians invaded, archeology shows). Roman mines got exhausted, regions which used to produce lots of food became poor, Return on Investment of many activities collapsed,. there were not enough slaves, nor small farmers to support production, or the army, the economy and security organized until then by the state faltered, from too small tax revenues, and finally the middle class and local government (the “curiales”) were destroyed by taxation, while plutocrats went on a rampage, grabbing most powers. Romans had to make transitions (new tech, no more slavery, less plutocracy!) They didn’t. We are in a similar crisis. ROI is collapsing, so is the biosphere. Robots are threatening to destroy much employment all together. The notion of productive activity, thus productive debt, has to change, forgiven or not.
Krugman himself concludes that the debt crisis will not abate. He does not say why. I will: it’s not just out of mental inertia, it’s out of viciousness.
Some will say I exaggerate. Not so. Look at Italy. The government debt is around 145% of GDP, and pays more than 3% interest. So it augments at the clip of around 5.5% a year. To diminish that debt, nominal Italian GDP ought to grow at more than 5.5% a year. But guess what? Not only is Italy not growing, but Italian GDP is smaller now than 14 years ago (with a larger population).
There is only one way out: default. That is tell the plutocrats that they can forget their money, or, more exactly, treating We The People as if we were indentured servants, or serfs. I rest my case.