Calvin, and most of his followers taught against greed, and the corrosive effects it has on our spirits. Any prosperity we have should lead to greater thanks toward our Creator; if not, it only does us harm.

Marcion: I meant the purchasing power of the median American is
going to be greatly diminished. They will be able to purchase less education, less health care, less energy and less food.

This process is occurring before our eyes. Drive to a grocery store and you will observe the diminished purchasing power first hand. The decline of the dollar is the most important signal that our aggregate purchasing power is being decimated.

I’m not exactly sure of what that means. More to the point, it probably has more to do with how you define “standard of living” than anything else. What consumption will be curtailed, and what impact will that have?

If we’re talking about education and medical care, that’s bad. If we’re talking houses with less square footage, less spending in Starbucks and chain restaurants, and less 200$ jeans, then perhaps the standard hasn’t been lowered all that much after all.

One of the things we need to re-consider is what exactly is the standard?

“Unfortunately most classical economists do not acknowledge the major flaw in the methodology of their dismal science. That historical event are not like repeatable experiments where models can be created an falsifiable counter-evidence can be observed. This is why economics is a laughing stock among natural scientists. And rightly so.”

Agree and disagree.

Agree that Economics certainly has a strong element of scientism, the attempt to use scientific method in a domain where it does not belong. The third voyage in Gulliver–to Laputa, the Floating Island–deserves attention for its early depiction of this phenonomen. The Laputans have an Academy where “projectors,” stuck on one idea, work for years in vain. They toil to extract sunbeams from cucumbers and seal them in bottles; they want to replace silkworms with spiders and endeavor to make clothes by trigonometry. That Swift was no enemy of progress, science, or invention is shown by his famous maxim that the greatest benefactor of mankind is he who can make two blades of grass grow where one grew before. But make-believe never escaped his lash.

Disagree with this insane modernist notion that science has a monopoly of truth. As per comments above concerning Malthus, mankind may very well be entering into a new era where science and technology have finally met their match. Postmodernist disillusionment may pale in comparison to what lies in the future. If so, the cachet of love and ambition, poetry and music may be greatly enhanced.

Economics is in no way less important than science, it’s that economics tried to be something which it is not. As can be seen in Rabelais and Montaigne, the caution was given: do not reduce all experience to formulas by reason: leave room for impulse and intuition, those acts of the whole being that are often called “nature,” or again, “the heart,” both by contrast with “the mind.” Wisdom lies not in choosing between them, but in knowing their place and limits.

Agreed. No one wants to face up to the fact that we HAVE to get our consumption down and our savings rate up, and that means either prolonged very low growth or a recession (more likely, nominal growth and negative real growth since that for some bizarre reason is politically more palatable, assuming of course that than can be engineered). There is tremendous denial of the fact that any way out of this mess means pain.

Vijay,

Second your point re the unacknowledged limits of economics. It’s one of my pet peeves. But having said that, the study of more data points would likely lead to more theories about causes and remedies. Competing viewpoints would hopefully lead to more caution and humility about prescriptions.

What we are seeing today is the major readjustment that MUST occur before we can return to normalcy. We can no longer consume the products of other nations and simply send them IOU’s in return. We will have to reduce our consumption, increase our savings and begin to create products worth exchanging again.

This is going to lead to a meaningfully lower standard of living for the median American.

Yves, you’re right that the constant comparison to the Great Depression is wrong-headed. But then, it would still be wrong headed even if we had 10 or even 30 different depression data points to work on. Each economic situation is unique and will play out in its own special way.

Unfortunately most classical economists do not acknowledge the major flaw in the methodology of their dismal science. That historical event are not like repeatable experiments where models can be created an falsifiable counter-evidence can be observed. This is why economics is a laughing stock among natural scientists. And rightly so.

It’s tangential, but I recommend reading this article and this comment
on the article.

That doesnt seem to be a way to resolve the housing situation.

Even if it is economically irrational for our creditors to slow down buying of our assets, since they would incur further losses on their existing dollar based holdings due to greater dollar depreciation, the prime objective of any government is to stay in power and keep domestic unrest at an acceptable level. We shouldn’t kid ourselves, we will be cut off if continuing to support our debt habit becomes too big a political threat to our funding sources).

The reason I raise the deflation question, even if it appears to be a red herring, is our policies for dealing with the crisis are based on obsessive study of one example, the Great Depression. I may be being simplisitc, but it is dangerous to generalize from one data point.

And another pattern than concerns me is the unacknowledged inconsistency in the approach to this crisis. Bernanke is absolutely out to prevent deflation, no matter if it means losing our reserve currency status (and like other readers, I am worry that the implications of that have not been thought through deeply enough, and the possibility of a dollar crisis has been assumed away) and that we are in parallel taking Japan-like “validate the asset value” measures via the Fed’s various facilities and the homeowner rescue measures before Congress. If there were a theory behind this, I’d feel better, but my sources have said the Fed is desperately improvising.