This Economic Storm Is Something New
Published on: August 26, 2011
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  • Peter

    “Paul Krugman and Dean Baker are making the left/liberal case that there hasn’t been enough fiscal and monetary stimulus.”

    Of course these lefties what more deficit spending.

    That’s because, in practical terms, this leads to inflation which is really a broad based tax imposed on wealth and savings. and what Lefty or liberal does not want more taxes which means more government control.

  • Luke Lea

    “People have lived in a bubble of artificial safety based on the belief that technocratic Keynesian management of a fiat money system can deliver semi-permanent prosperity without the disorienting booms and busts that made our great-grandparents so cautious and crabbed in their thinking.”

    It looks like China may not be immune to the temptations of fiat money either — at least if these two guys know what they are talking about.

    They describe the Chinese banking system — what banking system? — as a giant ponzi scheme in which all those toiling factory serfs are forced to deposit half their earnings in low-interest bearing bank accounts.

    The trouble is that the banks are often literally ordered by the communist authorities to lend to giant construction projects that have no hope of generating the income necessary to pay off the loans. Bullet trains, Olympic stadiums, freeways to nowhere, entire cities springing up in the twinkling of an eye.

    The workers are thinking their savings will be there to support them when they are old, because it is a certainty their children (make that child) will not be able to. Occasionally workers withdraw from their accounts, and if the local bank branch is short of cash the authorities just print up some to give to the poor sucker.

    It’s like Bernie Made-off times a million and eventually (if these guys are right) it will all come crashing down. You can imagine the misery and what happens next.

  • Soul

    Hope the hurricane does not cause to much damage in New York! I can’t help but chuckle to a certain extent about this. When building my home in Florida, I heard quite a bit about the dangers of hurricanes in the sunshine state. There for awhile, at least once a week it seemed! Many of the warnings came from New Yorkers. And now this, hurricane Irene. I’m sure I’ll have my fair share of hurricane concern in Fort Myers though – probably even this year. Take care.

  • Jim.

    “People have lived in a bubble of artificial safety based on the belief that technocratic Keynesian management of a fiat money system can deliver semi-permanent prosperity without the disorienting booms and busts that made our great-grandparents so cautious and crabbed in their thinking.”

    Like the tradition/scripture/reason balance that the West has maintained, could there be a balance between “cautious and crabbed” and the sort of spendthrift system of recent years?

    This administration — and Europe in general — has just about fallen off the “rationalist” side of the pyramid. We need tradition and scripture to flex a little more muscle these days.

    While I don’t want them in charge of everything (except maybe the banks), it seems this country could do with a little more old-fashioned Calvinist Puritans these days.

  • Denise

    [Ugly and delusional rant removed. no further comments accepted from this person.]

  • Dean Jackson

    There is potentially another element at play: Dani Rodrik’s ‘Trilemma’. The global system we have constructed is inherently imbalanced. As excerpted from one of his pieces:

    Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

    A somewhat fuller articulation is found in an article he wrote about Greece:

    http://www.project-syndicate.org/commentary/rodrik43/English

  • Anthony

    As politics is the realm productive of public policy, the troubles of the country trace back inevitably to politics (fiscal/monetary/tax/commercial policies). The democratic system thus comes full circle and the United States presents a parody of itself on the governmental level (look at our national polls vis-a-vis presidential aspirants; do we really believe any poll rated are up to 21st century task?).

    What we have before us is an operative and a formal political-legal system – the operative system (real system) has generated storm WRM laments. “…It is not clear today that even the U.S., the EU and Japan (Trilateral Commission?) have the financial resources, the technical skill or the political judgment required to play that role in 21st century” (controlling business cycle via moderation).

    The Dynamics intimated by WRM were brought about by people seeking wealth (not some inherent systemic flaw), using convenient institutions, ideologies and strategies while converting democratic institutions into vehicles facilitating vast profits for both economic entrepreneurs and PUBPOLS.

    Capitalism, since World War II, has had markets and resources available to developed countries and their populations (at expense of undeveloped countries and their populations) which enhanced their economic positions relative to rest of world. 21st century dynamics have supplanted old model and capitalism, resources, and markets, struggle to fashion a system incorporating more of world on different terms. Question is do Americans, wielding this instrument of democracy, know by what standards we need leaders (representatives) who will secure popular interest in a world of accelerating economic change?

  • Toni

    Call me simplistic, or just simple-minded, but I don’t see this situation as novel.

    In 1929, people had far less understanding of Wall Street than now. Esoteric financial arrangements proliferated then, and “transparency” didn’t exist. Only years later would government force *some* arrangements into the light, only under narrowly specified circumstances.

    No, world economies weren’t “globalized.” But the integration of all local economies in the U.S., over a huge geographical reach and with localities governed by the states, could be the early 20th c. of what we call globalization.

    The Depression was also “double-dip.” Unemployment had fallen from a high of 25% to below 15% in 1937 — and then climbed to 19% again in 1938.

    What troubles me are not the entitlement payments and interconnected economies of 2011 but the 1930s reaction of our 2011 government. The one strategy that doesn’t occur to the Obama Administration is the same one that didn’t occur to the FDR Administration. Namely, to get out of the way and let all sectors of the economy — small and big business alike — find their way back to health.

    Congress has cooperated in making matters worse with elaborate overhauls of two sectors which together comprise about one-third of the U.S. economy, and which are essential to the other two-thirds. I refer to health care and finance, of course.

    Obama, Pelosi and Reid evidently never asked themselves whether “the worst recession since the Great Depression” was the right moment to impose “transformational change.” Or they did, and they answered themselves, “YES!”

    I wish the Obama Administration and Congress would hit REWIND, pare sharply regulatory overgrowth, and leave the economy alone to heal.

    But then, if wishes were Porsches, beggars would drive.

  • Kris

    So enamored am I of my putative bon mots, that I will repeat my summary from another post: The global economy has become big enough to fail (beyond hope of rescue from national governments).

    “At the same time, we are paying an unexpected price for decades of controlled and managed economic performance”

    In the style of Glenn Reynolds, “Unexpected!”

    Regarding Keynes, I am somewhat dubious of his theories, but a case can be made that they have almost never been applied consistently. After all, he prescribed that governments apply stimulative policies during recessions, while retrenching during better economic times. While many ostensible Keynesians loudly advocate the former, they are rarely heard regarding the latter. One can argue that the reason that a Keynesian stimulus has not and will not work at present is because of the cumulative damage caused by ignoring the second half of Keynes’ prescriptions.

    (And yes, one can argue that this perversion of Keynes’ theories was to be expected, and perhaps politically unavoidable, thus rendering his theories practically worthless.)

  • Jacksonian Libertarian

    There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.
    The Government Monopoly is sucking $2 Trillion a year, at the Federal, State, and Local levels, from the Pool of job creating Capital. Had that money been left in the economy, it would have created 5 million $40k a year jobs, 5 MILLION JOBS!
    The Keynesian belief that money Supply isn’t going to be used productively unless the Government borrows and spends it is ridiculous, as Supply and Demand clearly states that price will adjust to balance the Demand. This means that interest rates would drop until all of the Capital is put to work.
    What would interest rates be now if the pool of job creating Capital was $2 Trillion larger? 1%?
    Would lower interest rates help our struggling economy?
    Would lower interest rates put a floor under our crashing Real Estate market?
    Depressions are created by only one thing, Government Monopoly borrowing which crowds out the productive job creating use of Capital. Between 1929 and 1933 the Government borrowed 25% of GDP sinking us into the Great Depression 1.0, between 2008 (the first Democrat budget after their takeover of Congress in 2007) and now, the Government has borrowed 35% of GDP and the borrowing continues. Welcome to Great Depression 2.0, we won’t get out of it until the Government Monopoly starts paying off the accumulated debt and flooding the pool of job creating Capital, as it did after WWII which ended Great Depression 1.0.

  • Charles Davidson

    This is deep thinking, gets to the roots of the economic challenges we face. Should be required reading for all economists. As usual, Mead gets to The Heart of the Matter, doesn’t pull any punches, illumines.
    The policy option is non-governmental: we, the people, need to change our behaviors.

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