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The recession is over but the depression has just begun

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Submitted by Edward Harrison of Credit Writedowns

This is a post I wrote earlier to day at Credit Writedowns. I just noticed that Albert Edwards and David Rosenberg are saying similar things. See the FT Alphaville post on their comments here.

As for me, for the last few months, I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.

As a result, I have been on a quest to find data which disproves my original thesis – signs that the green shoots that everyone keeps talking about (and a term I had banned from my site) are part of a sustainable economic recovery. Unfortunately, I have concluded that they are not. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I will try to pull together a number of threads from previous posts, add some context via Wikipedia links and draw in some good discussion via recent posts by Prieur du Plessis on balance sheet recessions and Marshall Auerback on the sector financial balances model of economics which completed the picture for me.

This post is very long and I have had to shorten it in order to pull all of the ideas into one post. Please do read the linked posts for background as I left out some of the detail in order to create this narrative.

Let’s start here then with the crux of the issue: debt.

Deep recession rooted in structural issues

Back in my very first post in March of 2008, I said that the U.S. was already in a recession, the only question being how deep and how long – a question I answered in the next post saying “we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82.” This has certainly turned out to be true.  The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K.. This was a period of low growth, high inflation and poor market returns, in which the U.K. became the sick man of Europe and labor strife brought that economy to its knees.  It is a period that saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labelled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism.  What this has meant in practice is that the well-connected, particularly in the financial services industry, have won out over the middle classes (a view I take up in “A populist interpretation of the latest boom-bust cycle”). In fact, hourly earnings peaked over 35 years ago in the United States when adjusting for inflation.

Remember, the 1970s was a difficult period in which the U.K. and the U.S. saw jobs vanish in key industrial sectors. To stop the rot and effectively mask the lack of income growth by average workers, a new engine of growth had to be found. Enter the financial sector. The financialization of the American and British economies began in the 1980s, greatly increasing the size and impact of the financial sector (see Kevin Phillips’ book “Bad Money”). The result was an enormous increase in debt, especially in the financial sector.

This debt problem was made manifest repeatedly during financial crises of the era. Not all of these crises were American – most were abroad and merely facilitated by an increase in credit, liquidity, and international capital movement. In March 2008, I wrote in my third post on the US economy in 2008:

From the very beginning, the excess liquidity created by the U.S. Federal Reserve created an excess supply of money, which repeatedly found its way through hot money flows to a mis-allocation of investment capital and an asset bubble somewhere in the global economy. In my opinion, the global economy continued to grow above trend through to the new millennium because these hot money flows created bubbles only in less central parts of the global economy (Mexico in 1994-95, Thailand and southeast Asia in 1997, Russia and Brazil in 1998, and Argentina, Uruguay, and Brazil in 2001-03). But, this growth was unsustainable as the global imbalances mounted.

Eventually, the debt burdens became too large and resulted in the housing meltdown and the concomitant collapse of the financial sector, a looming problem that our policymakers should have seen. This is why my blog is named Credit Writedowns. But, make no mistake, the housing and writedown problems are only symptoms. The real problem is the debt – specifically an overly indebted private sector (note the phrase ‘private sector’ as I will return to this topic).

This is a depression, not a recession

When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades.  This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity. Recessions can be overcome with the help of automatic stabilzers like unemployment insurance to cushion the blow. Depression is another event entirely. Back in February, I highlighted a blurb from David Rosenberg which summed up the differences between recession and depression quite well.

Depressions marked by balance sheet compression
Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand. Depressions often are marked by balance sheet compression and deleveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper. Unfortunately, as our former investment strategist Bob Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the opposite direction.

The next day, I highlighted Ray Dalio’s version of this story because it takes a historical view and rightly emphasizes the debtor instead of the lender as the crux of the problem. Notice the part about printing money and devaluing the currency if the debt is in your own currency.

… economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring…

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue…

The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.

However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.

Commence the fake recovery

So where are we, then?  We have left the fake recovery and are entering a new era of growth that could last as long as three or four years or could peter out very quickly in a double dip recession. By now, you have seen my post on the fake recovery, so I won’t cover that ground here.  However, I do want to highlight how I came to believe in the fake recovery and how asset prices have played into this period (the S&L crisis played out nearly the same way).  I see writedowns as core to the transmission mechanism of debt and credit problems to the real economy via reduced supply and demand for credit. Again, this is why my site is called Credit Writedowns.

In March, at the depths of the downturn I wrote:

The problem is the writedowns. You see, if you get $30 billion in capital from the government, but lose another $40 billion because of credit writedowns and loan losses, you aren’t going to be lending any money. To me, that says the downturn will only end when the massive writedowns end, not before.

The U.S. government has finally realized this and is now moving to stem the tide. Their efforts point in four directions:

  1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
  2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
  3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
  4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

I was more on target in my thinking here than I could have known. Within two weeks, the mark-to-market model was dead and mark-to-make believe had begun. It was then that I knew a recovery was likely to take hold. And it was going to be bullish for bank stocks and the broader market. What you should realize is that, despite the remaining problems in credit cards, commercial real estate or high yield loans, limiting credit growth, the changes instituted by government definitely have meant 1. that banks will earn a shed load of money and 2. that house price declines have stalled, underpinning the asset base of lenders. This necessarily means an end to massive writedowns, a firming of banks’ capital base, and a reduction in private sector deleveraging.

As an aside, I should mention that this dynamic called the asset-based economy, where economic well-being is dependent on asset prices, is far more pronounced in Anglo-Saxon countries like the U.S. and the U.K. (and Australia, Ireland, and Canada to a degree). While the free market ideal has gained sway globally, it is viewed with much more skepticism elsewhere. In Germany, for example, the term Anglo-Saxon is often bandied about as an epithet for political demagoguery to represent free market ideology. These cultural differences are something I explored in my post “Cultural attitudes on work, leisure and wealth in Europe and America.”

As for the recent asset-based economic reflation, be under no illusion that these measures ‘solve’ the problem. The toxic assets are still impaired and banks are still under-capitalized. But the increased asset value and the end of huge writedowns has underpinned the banks and led to a rise in the broader market in a feedback loop that has been far greater than I could have imagined at this stage in the economic cycle.

The double dip or the economic boom?

So what’s next?  A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

However, longer-term things depend entirely on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a recent post about Richard Koo from Prieur du Plessis which got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

This view of a second, more serious downturn mirrors the one I wrote of when I wrote about high structural unemployment last week. And, again, it is predicated on what government does.  I wrote last November that if government stops the support, recession is going to happen.

The U.S. economy cannot possibly work itself out of the greatest financial crisis in some 70-odd years in a mere 4 years and then expect to raise taxes on the middle class without a major recessionary relapse.

So, when you hear policy makers talking about reducing the deficit as soon as possible, what you should think is 1938 and continued depression.

Right now, if you listen to what President Obama is likely to do when we see more economic growth, you know that the government prop for the economy is going to be taken away. Koo again:

So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years.”

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

So to recap:

  1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
  2. The effects of this depression have been lessened by economic stimulus and government support.
  3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
  4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
  5. Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

Why is government spending necessary?

The government plays a crucial role here because of the huge private sector indebtedness.  In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector must pick up the slack.  Why do I say must? It’s because of an accounting identity which comes from the financial sector balances model. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade. But, of course, the G20 and the IMF are all talking about global re-balancing. This cult of zero imbalances is something Marshall first brought forward back in April. And it ignores the accounting identity inherent in the financial sector balances model. I highlighted this model in my post, “Minsky: Turning neoclassical economics on its head.” However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively – a recent cartoon shows why.  It is this knee-jerk aversion to what is viewed as fiscal profligacy which is at the core of the cult of zero imbalances.

So, what does this mean for the American and global economy?

  1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect).  That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
  2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
  3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
  4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
  5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.  While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver.  However, when the prop of government spending is taken away, the global economy will relapse into recession.
  6. As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
  8. From an investing standpoint, consider this a secular bear market for stocks then.  Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.

Not particularly uplifting, but hopefully well-documented. Your comments are very greatly appreciated.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. don

    Excellent, concise and well thought out.

    A couple of thoughts:

    Your presentation of government intervention does not highlight the extent to which that intervention has benefited financial institutions by way of taxpayer subsidies. This has lead to bigger banks that consequently today are larger (consolidation), and in which the description ‘too big to fail’ is even more applicable.

    Related to this, Fed actions have resulted in generating liquidity which finds a home in financial assets, as opposed to production, jobs, income, etc. Thus, the central bank is supporting renewed financialization of the economy, which will require greater reliance in the future on debt creation as a substitute for increasing incomes (an increase which implies – without going in to it here – a re-alignment of said income to close the immense gap between rich and poor). This re-creates the very internal contradictions that you are addressing.

    These two factors combined are generating resentment and anger in an increasingly larger number of US citizens who demand action by the government to help citizens, not bankers, speculators, etc. (admittedly I am being very simplistic here, but only to make my point in as brief a manner as possible). This anger leads directly into anti-deficit spending which is perceived as reckless and benefiting the well to do, contributing to the very dilemma that you address.

    Furthermore, these two factors reflect an attempt to smooth things over long enough so that the economy can get back to running again in a manner largely resembling that of the recent past, rather than structural changes that must occur and are of a global nature. You seem to recognize this, but then fail to address it.

    Last, your analysis, while consistently insightful, fails in this case to address the issue in a global context. Consequently, the analysis has limitation due to the emphasis on US domestic considerations.

    1. Edward Harrison Post author

      Don, your right, the focus is very much on the U.S. and that is a limitation of the analysis. Equally important would be China, Japan and the Eurozone – especially in regards to a discussion about currencies, protectionism and trade.

      And, I haven’t talked a lot about the wealth transfer that was the financial bailouts – mentioning the financialization of America/the UK and Ireland only in passing. But that is the limitation of the blog format. This post was very, very long as it was. I may have a post on this coming up as I was making similar noises to you Don on Canadian TV this past Tuesday.

      Thanks for the feedback.

  2. Denise

    Yes, I agree with Don, this was an excellent post! I really like how you put all these thoughts together. It made the situation much easier to follow than reading the separate postings as I have been. Actually, pretty devastating.

    I also note Don’s comments regarding the resentment and anger that is bubbling under the surface. One more big drop, and I can see that exploding.

    I have been reading Neil Howe/William Strauss’ “The Fourth Turning”. It seems to me that this will be the crisis they predicted in 1997. In my reading, I can see there will be a lot of pain to come. I wonder where, on earth, would be the best place to be when the @#&^ hits the fan!

  3. ComparedToWhat?

    Wow… I leave a bitchy comment and am so ashamed of myself I don’t check in for a couple of days… tiptoe back in to have a peek, and Ed blows my mind. Thank you! That post will take some time to digest.

    I’m surprised that the Plaza Accord wasn’t mentioned, nor the City’s Big Bang. The Japanese ramped up their boom in response to these. Koo’s perspective is worthwhile, but like Stephen Roach, he needs to be heavily discounted in terms of bias to the finance sector.

  4. molecule

    Here is what doesn’t add up. Higher asset prices will improve the debt picture(good). In order to acquire these assets then, individuals/firms must borrow more(bad). Why exactly do we want higher asset prices?

    Strangest thing, now that houses are becoming cheaper pundits want them to go up in price. They only wanted “affordable houses” made affordable by massive lending.

  5. Jack R

    Very good article, thanks. I know the subject is huge but, as you made no mention of either, what about the impact of peak oil and climate change? Surely, that’s got to put dent in most predictions by economists, as they seem to ignore these inescapeable facts?

  6. Charles

    The trouble with Richard Koo’s strategy is that it only buys time, but doesn’t actually solve the problem.
    Japan’s balance sheet (as taken from their flow of funds reporting) is still as high as a percentage of GDP that 20 years ago. Japan didn’t deleverage, it just changed the nature of the asset distribution (more govt debt, less private debt real estate and share). In Ray Dalio’s words, the essential restructuring process didn’t take place. The credit bubble is still alive in Japan, it has just morphed into a government bond / monetary assets credit bubble. Why the latter bubble takes so long to pop ?
    By default, people tend to trust their domestic currency. They even trust it more when a credit bubble starts to deflate because purchasing power of the currency tends to go up (this is the case today). In a world of governments indebted in their own fiat currency, only an external constraint can break the charm : When foreigners start to refuse to accept your paper currency in exchange of their goods, the price of essential inelastic imported goods (I.e. oil) shoots up so high that it triggers the inflation that increases nominal GDP and performs the de-leveraging.
    It cannot happen to a country as long as it has a positive commercial balance. This is why the government credit bubble still endures in Japan after all these years.
    In the case of US and UK, that have significant foreign funding needs, the endgame is likely to be nearer. The problem is that countries are hesitant to pull the trigger on the US govy debt because they know that a collapse in trade with US will force them to face their own government debt (or guarantee) bubble sooner rather that later.
    UK is quite obviously the one that will go first, but I am not so sure that US is the logical follower. Even if eurozone has no funding constraints, it is very heterogenous. If Germans balk at the prospect of further financing PIGS, the uncertainty of what a Euro really is (Is it the same if your correspondent bank is in Madrid of Frankfurt ?) could weaken the currency.

    The other route for de-leveraging once government brought all the turds in their balance sheet (which seems to be true in all significant countries in the world) is for them to impose negative real rates through taxation of interest/dividend income, or even asset values. That may explain why the g20 went ballistic on tax havens : it was mere preparatory work !

    1. mannfm11

      I think you are not only on to something Charles, but I expect something like this to arise soon. I don’t believe the inflation threat is so great with the US, but more debt will never get you out of debt, which is what inflation is. The world needs dollars to transact trade and there is no guarantee the international flow of dollars will continue to increase. The productive capacity of the US is greatly under estimated and is actually hidden by the fantastic appetite of Americans for goods due to excessive credit. It would shock most people to learn the US is still a larger energy producer than Saudi Arabia, though it has depleted all of its mineral wealth if you believe the naysayers. Also there are other goods the world needs and the world itself depends on the US buying from them.

      I believe if the dollar does survive, it will be because the US either decides to back it with precious metal, finds a way to cycle a tax/debt repayment scheme or restricts credit and the rest of the world find US assets desirable to hold. There are people and it appears there are many that seem to believe the US goes to third world status while China with its 200 million or so living on $2 a day becomes the modern super power in the next 5 years.

      I do believe our leaders are going to need to show more intestinal fortitude. The American people will go through some sacrafice if it means coming out the other end in better shape. Hopefully our super wealthy can do the same thing, as they will need to take a haircut. I somewhat subscribe to the Steve Keen/Hudson idea that we are going to need some kind of bankruptcy to get through this.

  7. Dave Raithel

    Everyone will find what mosts interests them, especially in a post as dense as this. I was most struck by one of the passages from Dalio:

    ” … economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring…

    This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.”

    This puts him in the camp with (how one reads them, I guess) Keen, Buiter, one of the Tyler Durdens, maybe somebody at FT, and probably others (Black? Those Counter-punch economists) that capitalism needs a Jubilee? Latin America was Dalio’s example – not his universal.

    Economic health requires that somebody be made worse off.

    There is no Pareto-efficient way out of here, says the joker to the thief …

    1. Justicia

      “There is no Pareto-efficient way out of here, says the joker to the thief …”

      Great line. Great post.

      We also face another type of debt crisis — deficits of natural capital — that will further complicate the monetary unraveling. When you add in the effects of climate change, peak oil (and the need to change the global energy economy) and growing per capita scarcity of water we are headed for major upheavals, financial and social.

  8. CrocodileChuck

    Michael Hudson was one of the first economists to invoke the necessity of a ‘jubilee’ in 2008 (and, actually explain the original meaning of the word).

  9. Swedish Lex

    Many thanks. Well crafted.
    I have one question. If I look at points 6 and 7 in your final summary, what are the odds, in your view, A) that banks’ capital will be depleted in the process of deleveraging (see the IMF’s most recent estimates) and B) that governments will have to step in entirely as consequence?

  10. Charlie Bucket

    Enjoyed the depth of analysis. But I’m wondering about your lack of consideration of large potential changes in effeciency in certain important inputs, specifically energy? It certainly appears that huge moves in the purchase and application of technologies and human resaources in at minimum an attempt to force transition, are underway. The synergy and effeciency potential appear enomous. Couldn’t big shifts here alter your thesis signifcantly? Haven’t new industrial bonanza’s mitigated previous imbalances? Won’t a real environmental, sustainability, and energy shift change it all over a 5-10 time frame?

  11. mannfm11

    I don’t buy Koos argument. I saw the video of him last winter and for all practical purposes, it sounded good at the time. The problem if compound interest is much more difficult to handle than one can be educated in these times to understand. That is why there is less value in assets i the world than $5 compounded at 5% since the birth of Christ. The problem is debt in sum. The other problem is that people support government, not the other way around, even Communist governments. Economies that have grown to be based on credit cannot survive without adjustment to something else. This means, in the meantime the lack of credit purchases in itself creates a depression. One cannot save in sum and not continue to use excessive credit to consume. The proposal is basically that the debt be shifted to the government who will now owe those that support it their retirement. The entire social game is suppported on this idea, which is absurd. I debated this yesterday, while trying to describe that the Social Security trust fund was treasury bonds, which of course arose from the fact the money had been spent, meaning the only means of paying the money from these bonds was to tax the very population that was to receive the proceeds from these bonds.

    It appears to me that what has transpired is a natural path of mankind. John Law did it in France in the early 1700′s as did the English with their South Seas bubble. The world suffered and learned a lesson only to become mired in mathematical confusion once more. Plus, it wasn’t the Fed nor was it cheap interest rates that caused this. The Japanese carry trade was enough, but the shaddow banking system of leverage itself added to the absurd idea that you could and would make a purse out of the sows ear of subprime and junk securities was the real culprit. Subprime had absolutely nothing to do with low interest rates.

  12. unirealist

    While a staunch believer in equivalences and identities, I’m puzzled by Auerback’s contention that private-sector surpluses must mirror public deficits.

    Turn it around, and the implied assertion is that public deficits will be mirrored by private surpluses. But then how does one explain the vast increases in both private and public debt through the 80′s, 90′s, and 00′s? Shouldn’t the enormous increases in private debt have effected great reductions in public deficits? Clearly they did not; both rose, in gross terms as well as percent of GNP.

    I suspect that Auerback’s “identity” has some theoretical value, but only within well-defined parameters which do not exist in the real world.

    And on a gut level, I am horrified that anyone would argue for exploding federal deficits as a palliative for the sea of red ink in which the US – both public and private – is drowning.

    1. Fair Economist

      The problem with Auerback’s analysis is a confusion between net debt and gross debt. US Private debt has exploded in the past 40 years or so. But it’s mostly owed to other private entities in the US. The net debt is much lower. Net debt has to be balanced by outside surpluses (foreign in this cycle) but gross debt can go to the moon without any net debt if it’s Sam Walton buying mortgage bonds on Las Vegas real estate.

      Gross debt is a problem, but not in the macro balance sense. Gross debt reflects a combination of a mismatch within the society of income and consumption, and planning for the distant future, which necessarily involves planning errors. The economy will suffer from these problems, which have resulted in poor investment on the part of the economy (too much upscale shopping; too many McMansion farms; too many lawyers and MBAs). The gross debt has allowed these problems, but it’s not a problem in itself (unlike net debt.) Correcting those errors will indeed cause a long period of poor growth, but the amounts are hard to estimate because we have to know how erroneous the investments have been – which we can’t know until we see how things shake out. The problem is not described by intersector macroeconomic flows.

  13. mannfm11

    Auerbach used to write for Prudent Bear here in Dallas. I never thought his writings matched the company line there. Doug Noland has been on top of this game for 10 years or more now. But, one set of assets in debt have to match another set of liabilities. But,when it comes to government, only those that are owed by government can ultimately pay them if they are domestic. Saving solely through an accumulation of domestic government debt is an absurdity.

  14. Johan

    I enjoyed the article, and I largely agree. The conclusion though, that we will have a super depression which will correct the structural imbalances in 3 to 4 years can be questioned.

    Resetting of the structural imbalances will only occur when the government cannot buy any more time, since a restructure comes with a considerable political cost, and no politician wants to be the one to bear that cost.

    So if we begin to see a considerable drop in the next 3-4 years, the government will answer with even more debt to defend asset prices, the dollar etc.

    The question is therefore; at what point is more public debt not an option for the US any more.

  15. Bruce Krasting

    Part of the problem we face is that the US HAS to grow at an average of 3% a year. If we don’t then we can’t afford to make good on all of the social obligations that have been made. We will see this in 2010 when we face the reality that SS will be running a deficit. Without growth everything explodes.

    So all of the policy actions of the past year have been driven toward a resumption of growth. It worked. We will probably have positive growth in the 3rd and 4th quarters. But we are learning today that this is unsustainable. The push for growth just caused a mini bubble in asset values. It will not work for long.

    We need to confront the reality that we are not as rich as we thought we were. That entitlements can’t be paid for with borrowed money. We need a slow growth policy. Target sustainable economic activity at 1% versus 3%. We are a mature economy with an aging population. 3% is not achievable without the constant boom bust cycle that hurts everyone.

    Yes it means that we can’t have all the things our country wants. We can’t be the global army of peace any longer. We can’t afford NASA. We need a heath care system that acknowledges that we are broke not rich. We need to realign the SS obligations. The list goes on. It would be a shame that we have to go through a depression to learn this lesson. But that looks to be the most likely outcome.

    1. Anonymous Jones

      I understand that the vast majority of the people in this country continue to claim that “we” are “broke,” but the facts say otherwise. There are assets in this country that are very valuable. Yes, there is a debt problem. A large debt problem, both in the private sector and the public sector.

      But debt problems can be remedied. In particular, not that I’m advocating this, but the debt problem and the entitlement problem could be dealt with by a combination of massive printing of dollars (at least triple our current rate), higher taxes, and wealth redistribution.

      I understand that this will never happen, but it’s not because we’re broke; it’s because the oligarchs will never let it happen (and also because it would cause massive trust and dislocation problems throughout the entire world).

      The larger point is that (1) it is much harder to be “broke” when most of one’s debts are in one’s own fiat currency (and the US is most certainly not “broke”) and (2) the entitlement problem is a redistribution problem and framing it as a solvency problem is simply hiding the ball.

      1. DownSouth

        Anonymous Jones,

        You say “I understand that this will never happen…”

        I wouldn’t count on it.

        As Kevin Phillips said on the last page of Wealth and Democracy, “high taxes on the assets, incomes, or consumption patterns of the rich–or all three–could be used in the twenty-first century to fund the late-twentieth-century promises of entitlements like Social Security and Medicare.”

        I tend to agree with Phillips that what we are currently experiencing are the twilight years of the American Empire.

        John Gray, who teaches at the London School of Economics, is the only person who seems to have captured the full symbolic significance of 9/11. “They destroyed the West’s ruling myth,” he wrote in the opening paragraph of Al Qaeda and What It Means to Be Modern.

        And it is entirely possible that the US will follow in the footsteps of Great Britain in its final years of global hegemony. “In Britain, changes that seemed impossible in 1902 or 1904,” Phillips observes, “became serious discussions in 1909, law in 1913, and were supplanted by even tougher statutes in 1919 or 1938.”

        It is either that or the US will evolve into a full-blown police state. Here’s the final paragraph in Wealth and Democracy:

        As the twenty-first century gets underway, the imbalance of wealth and democracy in the United States is unsustainable, at least by traditional yardsticks. Market theology and unelected leadership have been displacing politics and elections. Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime—plutocracy by some other name.

        One only has to look at what happened at the University of Pittsburgh last Friday night to see that the threat of plutocracy is alive and well:

        It is rather obvious to the people of Pittsburgh what is going on:

        This story should have gotten national coverage, but I think we can see by the blackout in the national media who’s in control there.

        1. DownSouth

          Anonymous Jones,

          I’ve tried several times to post a link to a video that shows what happened on the Pitt campus last Friday night and the links to four photo-essays from the student newspaper, but there seems to be some sort of censor at work that will not allow the links to be posted. I will try again, one at a time to see what happens. Here’s the video:

  16. eric f

    In the post, you say quite clearly “Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009.” Does it make sense to wonder if, since many of the governmental efforts (QE, low interest rates) tend towards a declining dollar, stock prices in dollar terms may appear never to touch 2009 lows even if they fully retrace in real terms?

    1. Edward Harrison Post author

      Yes, that was an oversight on my part. My view is that it is real returns that matter. For instance if you look at real returns in the 1966-82 bear market they were of a similarly catastrophic fall to those of the Great Depression. In the U.K., because of high mid-70s inflation, the crash there wiped people out completely. So, yes, I’m talking inflation adjusted terms.

      But of course I lean toward the deflation camp so I imagine the decline will be in nominal terms as well.

  17. Cool The Kid

    Good post… this is my first time seeing this blog

    I know many people wanted incorporation of what I see as their own personal interests (not financially, just as people) like peak oil or the problem in a global context… but I think the blog dude got it right. The economy runs on debt, and the private sector is deleveraging… without fundamental changes in the way the US economy + currency system works, the govt will either have to tax more (doubly, as revenues are falling, along with wages), or more logically spend less.

    Medicare + SS are headed for a huge crash landing without some kind of major intervention, but the cowardly officials we’ve elected keep passing off the hot potato. Truthfully, had Bush not been such an idiot, I think his plan for individual retirement accounts would have been instrumental in the long term rescue of our economy.

    As long as the govt keeps taking on new obligations (Medicare, SS, Treasury debt, and now universal healthcare) we will only head deeper into the debt abyss, until eventually those who hold our debts will put their feet down and ask how the hell we plan to sustain this. It will take a sacrificial political lamb to break through the ties of bureaucracy, special interest groups and the growing entitlement mentality in America to make the really tough decisions and actually effect long-term positive change.

  18. Hunter Lewis

    “However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism.”

    I agree that we have stumbled into a system of crony capitalism. I also agree that Keynes himself would have been appalled by it, but at the same time I think that crony capitalism is an inevitable outgrowth of real Keynesianism as presented in the General Theory. I make this case in my new book, Where Keynes Went Wrong.

  19. Jeff Rosenberg

    Excellent and educational post, though I’ve a quibble with:
    “If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession”.

    This doesn’t strike me as a “law”, but merely a politically desirable outcome; therefore the use of “must” is incorrect. I say it’s not a law / “must” situation because the measurement seems like so much putty: “net saver” in what terms? Dollars, which can be devalued by fiat inflationary injections or, conversely, appreciate via deflation? % of GNP, itself a highly suspicious statistic?

    Calling this purported balancing a “law of double entry book-keeping” seems to assume that, somehow (i.e., “must”), natural forces will keep inflation or deflation at bay. I think this isn’t a “law”, but instead a guiding INTENT that gov’t and Fed will aim for as they try to avoid either inflation or deflation … but that doesn’t mean they’ll be successful. Later sentences in the post seem to support this.

    I freely admit I’m a stickler for definitions and clarity and a beginner on economics, so maybe I’m just not cognizant of the profession-specific usages of these terms (though then I’d argue the profession ought to recalibrate so as not to confuse everyone else with “laws” that are intents, “must’s” that are “ought to, within all other parameters remaining equal”, etc.)

    All that said, excellent post and comments.

  20. ronald

    Thanks Ed,

    The financial sector depends upon credit growth and its main attribute debt. Since the political class has merged with the financial sector its little wonder that the financial health of our economy is measured in credit growth.

  21. Stevie b.

    @ Bruce Krasting. From my perspective you have hit the nail squarely on the head and I’ve suggested something similar to Ed on his blog – but “slower growth is better growth” wont just apply to the US but large swathes of the developed world until such time as technology overcomes the bottlenecks associated with limited global natural resources. Meantime there will be an inevitable ongoing levelling of the global pay structure as the developing world continues to grow and uses natural resources in a less technology-driven manner.

  22. gigi

    I don’t agree that public sector must increase its debt so the private sector can repair its balance sheet. For the past 2-3 decades, both government and private sector increased their debt loads. The “asset” is the accounting entry on the creditor’s book. If debt can be created, it can be destroyed as well, it doesn’t need to be transferred from private to public balance sheets.

    Debt is destroyed by default, transfer of assets in lieu, or a combination. People who have assets (i.e. society owes them) wind up with assets, and have to take a haircut on some loans. People with debt give up assets or go bankrupt. This is the liquidationaist approach.

    I think excessive (and that is an understatement) debt is the fundamental problem. It must be destroyed or we will never go back to a healthy economy. The great depression ended not because of government intervention, not because of currency devaluation, but because enough debt was destroyed that the economy became viable again.

    The proper course of action for this crisis was to let the liquidation happen. Let the banks go under, let economic activity collapse. We would all still eat, this is not the 30s. Then follow up with massive reflation. The debt is gone and the reflation, currency devaluation, whatever, all will hold.

    Now we have a game that can only end in a collapse of the US dollar. Why is that any different than “liquidate, liquidate, liquidate”?

  23. Hugh

    I have been writing about depression since last year. We were at the point of depression then but the large scale interventions by the Treasury and the Fed (the Treasury by another name) managed to mask the underlying fundamentals without actually correcting them. The government did this by transferring debt from the private sector on to itself and taxpayers. The ability or the will of policymakers to continue this massive misallocation of resources at some point will end. The underlying fundamentals which have been steadily deteriorating will be unmasked and a big D depression will result. Having looked at both the politics and the economics, I consider this will most likely happen in 2011.

    What you call the “financial sector” I call the paper economy. It is the product of the transfer of wealth away from the middle class to the wealthy and corporations. You can date part of it back to Carter but that was mostly recession related. The process really took off post-recession under Reagan. It had two major effects. The wealth transfer was not used productively by those who received it. The result has been the succession of bubbles and bursts we have seen. Meanwhile to keep up the number of wage earners increased in middle and lower class households. Eventually even this wasn’t enough and they began taking on greater and greater debt.

    Debt is certainly an important part of the depressionary conditions we are seeing. But it was the construction of the paper economy and the ongoing efforts to prop it up that make depression inevitable.

  24. Lavrenti Beria

    “Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.”

    And here the fascist character of the ruling clique is most on display, seen clearly in its staging of the brownshirt town hall eruptions, the recent bomb Iran media campaign and in the overall “who’s losing Afghanistan” stupidity. Any “populism” that seeks to support these tendencies is no populism at all, but rather a perverse sort of sustenence for the vermin that run the system. What’s worse, the prescriptions of these faux-populists will lead to an exacerbation of the principal risks outlined by Ed in this very fine piece. But one more burst of downside and you might just see the emergence of an authentic populism born of little people, one that might undo the corruption on which our whole edifice of lobby-owned public service has been grounded. And, yes, indeed, it will be “muscular”, muscular enough to see to the detention, interrogation and public trial of the filth that brought our misfortune about.

    1. DownSouth


      I think the bona fide protests began last week at the G20 in Pittsburgh.

      Here’s a superb column by a local columnist that gives the gist of what went down:

      And here’s a news story:

      Notice the difference in how plutocrats treat people with a message they truly fear vs. the “faux-populists” at the Tea Parties and town hall meetings.

      In my response to Anonymous Jones back up the thread I linked to a lot more info.

      America hasn’t seen anything like this since the 60s at Berkeley where, according to Hannah Arendt, “not just tear gas but also another gas, ‘outlawed by the Geneva Convention and used by the Army to flush out guerrillas in Vietnam,’ was laid down while gas-masked Guardsmen stopped anybody and everybody ‘from fleeing the gassed area’.”

      These college kids are very ingenious. They got a copy of the police radio dispatch the night of the most egregious incident:

      You can hear how “Hammer and Anvil,” in the police’s own vernacular, all went down. The police sealed off all the streets around the Quad and then ordered the kids to disperse. Of course they couldn’t because the police had the area sealed off and they were trapped. Then they drove everyone to the Quad and then launched tear gas, indiscriminately fired rubber bullets into the crowd and used an audio weapon that has only been used against enemy troops against the students:

      1. Lavrenti Beria


        Sorry for the delay in posting. Up to my eyeballs in alligators over the last 24 hours. I’ll have a response later today.

        Best regards.

      2. Lavrenti Beria


        And all of this to insure that Manny, Moe & Jack could stand before the cameras to announce with such disingenuous pomp the uncovering of a “secret” Iranian uranium enrichment facility, one just obviously aimed at the production of weaponizable materials! And what of Israel’s safety, they asked, that without mentioning Obama’s recent meeting with Oberstgruppenfeuhrer Netanayhu to renew their secret inter-governmental arrangements to protect against public disclosure of Israel’s arsenal of 200 or so nuclear bombs! Normal people are incapable of such hypocrisy without at least some suggestion of guilt. But here we’re dealing with a form of life that barely manages the transition from algae to leaf-bearing plant, aren’t we?

    2. DownSouth


      Also I left a final comment for you the other day on a thread just before it dropped off into oblivion, so I doubt that you saw it. I can’t find it in archives since they only go up to Sept 17 so I will post it again and hope you see it this time:


      I fully understand your position. You say that there “will be no changing this reality short of massive public demonstrations and/or economy stopping strikes.” And undoubtedly both Gandhi and MLK would agree with you that those demonstrations and strikes can be conducted and justified under the rubric of “non-violence.” But there is some subtlety inherent in this argument, and I think it’s necessary to thoroughly think through that subtlety so that one is not caught off-guard when confronted with it.

      There’s been quite a bit of talk recently about a Debtors’ Revolt, including this post here on NC:

      Such an action definitely falls within the bounds of “non-violence.” “Non-violence is essentially non-co-opertion,” Reinhold Niebuhr tells us. “It expresses itself in the refusal to participate in the ordinary processes of society.”

      But, as several of those who commented on that thread were quick to point out, such an action would end up hurting innocent people, just as those “economy stopping strikes” you speak of would hurt innocent people. “Non-violent conflict and coercion may also result in the destruction of life or property and they usually do,” Niebuhr writes. “A strike may destroy the property values inherent in the industrial process which it brings to a halt, and it may imperil the life of a whole community which depends upon some vital service with which the strike interferes.” “Nor can it be maintained that it isolates the guilty from the innocent more successfully than violent coercion,” he adds. “The cotton spinners of Lancashire are impoverished by Gandhi’s boycott of English cotton, though they can hardly be regarded as the authors of British imperialism.”

      So if “non-violence” coerces and destroys and hurts innocent people just as violence does, is it any more justifiable than violence? Can it be justified?

      Both Niebuhr and Hannah Arendt answer in the affirmative. I won’t go into Niebuhr’s rather entailed moral defense of non-violence, other than to say that destruction is the intent of violence, whereas with non-violence destruction is an inevitable consequence. There is no place in non-violence for the embittered Madame Lafarge’s demand that the innocents’ heads roll.

      But the practical advantages of non-violence over violence are ample:

      Both the temper and method of non-violence yield another very important advantage in social conflict. They rob the opponent of the moral conceit by which he identifies his interests with the peace and order of society. This is the most important of all imponderables in a social struggle. It is the one which gives an entrenched and dominant group the clearest and the least justified advantage over those who are attacking the status quo. The latter are placed in the category of enemies of public order, of criminals and inciters to violence and the neutral community is invariably arrayed against them. The temper and the method of non-violence destroys the plausibility of this moral conceit of the entrenched interests. If the non-violent campaign actually threatens and imperils existing arrangements the charge of treason and violence will be made against it none-the-less. But it will not confuse the neutral elements in a community so easily…
      Non-violent coercion and resistance, in short, is a type of coercion which offers the largest opportunities for a harmonious relationship with the moral and rational factors in social life.

      Arendt doesn’t buy into MLK’s or Gandhi’s notion either that non-violence is without violence. There are just too many logical fallacies in it. In Crises of the Republic Arendt has a whole chapter “On Violence” where she delves into the use of violence (non-violence) to provoke a violent reaction and thus expose the covert and hidden coercive factor in society:

      Not many authors of rank glorified violence for violence’s sake; but these few—Sorel, Pareto, Fanon—were motivated by a much deeper hatred of bourgeois society and were led to a much more radical break with its moral standards than the conventional Left, which was chiefly inspired by compassion and a burning desire for justice. To tear the mask of hypocrisy from the face of the enemy, to unmask him and the devious machinations and manipulations that permit him to rule without using violent means, that is, to provoke action even at the risk of annihilation so that the truth may come out—these are still among the strongest motives in today’s violence on the campuses and in the streets. And this violence again is not irrational. Since men live in a world of appearances and, in their dealing with it, depend on manifestation, hypocrisy’s conceits—as distinguished from expedient ruses, followed by disclosure in due time—cannot be met by so-called reasonable behavior. Words can be relied on only if one is sure that their function is to reveal and not to conceal. It is the semblance of rationality, much more than the interests behind it, that provokes rage. To use reason when reason is used as a trap is not “rational;” just as to use a gun in self-defense is not “irrational.” This violent reaction against hypocrisy, however justifiable in its own terms, loses its raison d’etre when it tries to develop a strategy of its own with specific goals; it becomes “irrational” the moment it is “rationalized,” that is, the moment the re-action in the course of a contest turns into an action…

      1. Lavrenti Beria


        Let’s be clear, I’m simply stating what I regard as factual: That there will be absolutely no recovery of democracy in the United States short of massive public demonstrations and/or the general strike. I made no statement in support of violence – although at one point I believe that you’d thought that I had – neither had I anything to say about the non-violence of Gandhi and King. Method had no place in my thinking at all, truthfully. I’d concerned myself solely with the hopelessness of the present situation and the kind of outcome that would of necessity emerge once public awareness of it became acute. The comment, “Revolutions are not made, they come”, attributed to the abolishionist, Wendell Phillips, might be instructive here. I’m not sure where that leaves Neibuhr.

  25. Cullpepper


    Two ways out:

    1. Run the presses, devalue the currency, save the banks but destroy the working class.

    2. Force wages to rise, engage in hyper-protectionist trade policies, but destroy the banks and major (paper) asset holders.

    Guess which one the politicians will pick?

    *cough* campaign finance reform *cough*

  26. BawldGuy

    This post is one of the best written I’ve seen on the subject this year. Much appreciated.

    I’ve read the entire comment thread and am more than a tad surprised nobody has wondered why a huge income tax cut/corporate too, wouldn’t have the same results it did 25 years ago?

    The human condition is dynamic in nature, changing with altered circumstances. As taxes rise higher and higher, why won’t we end up the same way citizens of the USSR did? I’m reminded of the famous quote: “We pretend to work, and they pretend to pay us.”

    According to OMB, the dollars into the Treasury from 1/81-1/89 increased by a robust 95%. Jobs skyrocketed, while the lower and middle classes basked in the promise of keeping much more of their earned income. Income from taxes rose because of a simple truth — a smaller percentage of a much larger pie results in more actual dollars received.

    Tell me again why this is a bad idea? Tell me again why cutting marginal personal income tax rates from 70% to 28% wasn’t magnificently successful.

  27. Hugh

    “Tell me again why this is a bad idea? Tell me again why cutting marginal personal income tax rates from 70% to 28% wasn’t magnificently successful.”

    Because you are dumping it into the hands of the bubblemakers. It would be far better used to increase the purchasing power and economic stability of the middle class.

  28. Vinny G.

    Great posting.

    This recession is like Alzheimers: insidious onset, but irreversible and grim outcome.

    Vinny G.

  29. ibsage

    good post as far as it goes (and that is not meant to be critical). but it seems to me that all the economic and financial complexity simply hides the real problem i.e. world population growth in the face of resource constraints and environmental limits.

    in other words, real wealth per capita worldwide will decline notwithstanding all our efforts short of meaningfull population control (highly unlikely).

    how this will be reflected in the financial and economic world is what this post attempts to address without recognizing that ultimately it’s all simply a terribly complicated game which has no solution within the context of game’s rules. short of controlling population, no actions will forestall the eventual malthusian dilemma.

  30. john bougearel

    In the Fed’s appeal they said:

    “Public disclosure is likely to cause substantial competitive injury to these financial institutions including the loss of public confidence in the institution, runs on banks and possible failure of some institutions,” the Fed said in its notice, which asks to put the lower court’s order on hold until the appeal is prepared.

    But this would be a very good thing for populists, and for the country as a whole.

  31. Blindweb

    “Deficit spending on this scale is politically unacceptable”
    No it’s reality unacceptable. One can’t keep borrowing money without that debt increasing productivity, The U.S. must stop or hit the debt wall. Otherwise excellent article.

  32. tonymango

    Wonderful! Thanks Heaps.

    Assuming Govt. policy is respondent to percieived variables. It makes me think about the Peasant farmer in China who has had his savings (pension) invested on his behalf in $US denominated instruments.

    US dollar inflation may derail the ‘Chinese Locomotive’ theory of global economic recovery that is doing the rounds, particularly in Brazil and Australia.

  33. Ecotopia

    In this post you are basically calling for crypto-Communism here. What a shame.

    “The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.”

    No, it is not overconsumption, but rather overproduction. We are victims of our own success, basically.

    The best hope for the future of job growth in the modern post-industrial USA are so-called ‘green-collar jobs.’

    The fact is that all economically prosperous nations suffer from a major and unavoidable overproduction and oversupply of goods and services as we in the USA are now experiencing — this is a natural outcome in all advanced post-industrial economies, and this means there are less available jobs for people to do because all necessary human needs have already been met and all necessary economic niches have been filled. There are less people needed for factories because one machine can now quickly do the work of many people; similarly, there is less demand for various goods because most people already have all that they need and thus do not need to buy more and more stuff…same with very many services. We can only consume so much, and overconsumption is very bad for the environment anyhow.

    We are in a major period ’stagnation’ or economic leveling-off because of all the economic successes of the past; much of Western/Northern Europe has been in this leveling-off stage for well over two decades now. Economies and countries cannot grow forever because the human population is limited due to the fact that necessary resources and space are also limited on this finite planet.

    The best hope for the future is the growth of various ‘green-collar jobs’ which will help to undo some of the environmental damage which has happened since the advent of mass-industrialism in the last 100+ years. Instead of training even more near-worthless MBAs, accountants, lawyers, bureaucrats, tax collectors, bankers, and other similar parasitic paper-pushers, why not train more people to be ‘green-collar’ workers who get good and environmentally-beneficial things done in the real-world, workers like on-the-ground eco-conservationists, soil scientists/anti-erosion workers, forestry experts, small/medium-sized farmers and master gardeners, solar panel technicians, animal husbandry experts/livestock veterinarians, water protection officials, wind-turbine constructors, recycling experts, botanists, ecologists, green-energy scientists, and other similar jobs? We should also encourage more people to be nutritionists, physical fitness trainers, and so on in order to whip more people back in to decent shape after years of degenerating behind desks. Four-year Bachelor degrees or Master degrees which cost $30,000+ to gain and thus saddle students with large debts are not required for many of these jobs or careers — local community colleges should be expanded and/or retrofitted to begin training large numbers of people in these types of fields, as 2-3 year technical and/or Associate degree programs can thoroughly prepare people for many of the aforementioned jobs. What we need now are more societal SUSTAINERS because we are an advanced nation and thus nearly everything that we need is already built; the idea of ‘perma-growth’ is a fraud, as is the paper-shuffling/banking/restaurant/retail/entertainment and outright gambling economy that the USA is trying to (unsuccessfully) sustain itself upon.

    In the USA, the primary problem with the housing industry, the auto industry, the retail industry, the restaurant industry, and even many of the service-sector industries such as law, medicine, banking, and so on in the USA and elsewhere is massive overproduction, oversupply, and overcapacity. However, the general public remains woefully ignorant about this very crucial fact. Even many mainstream economists are unaware of this and/or they try to hide this fact with their incessant obscurantism and useless theorizing.

    Mass-industrialism and advanced technology always tends toward a huge oversupply of goods and services — which is exactly what we are ’suffering’ from now in the current economic malaise. Far from being tapped out, the American economy is full to the point of bursting. There is no ’shortage’ of ANYTHING, not cars or housing or food or or clothing or electronics or medical care or educations whatever — in fact, there is a massive oversupply of all those things plus more. The manipulative money-masters are trying to fool the always nervous masses with the ILLUSION OF SCARCITY. But there is no scarcity of anything, and there never was. As I said before, we here in the USA and in all other economically advanced nations are ’suffering’ from our own economic success, basically. We have thoroughly solved the problem of PRODUCTION, and now we must solve the problem of DISTRIBUTION. This is the great challenge which now faces us.

    Overproduction is the ‘dirty little secret’ of modern society that the international bankers, fat-cat plutocrats, the lying mass-media, and other assorted rip-off artists want to keep hidden from the public because if people really knew the superabundance amongst which we live there would be riots in the streets and the everyday workers would begin to demand the goods and services which they themselves produce and provide for much cheaper.

    There is no shortage of anything except decent, well-paying jobs in which people are not forced to become heavily indebted neo-serfs because they are being paid near-starvation wages. And as already I stated there is only a shortage of jobs because of the mass-mechanization of labor which has been occurring in the last 100-150 years since the Industrial Revolution which has resulted in the gross oversupply/glut of goods like cars, houses, food, clothing, and all of the various services such as medicine, law, banking, education, etc. Nearly all technologically-advanced/industrialized nations have high unemployment because of the incredibly efficient overproduction/oversupply of goods and services which they produce via the use of advanced technology and the efficient utilization of labor…that is the natural outcome of the mass-automation and mass-mechanization of labor. In other words…”the machines took our jobs!“

    I will say it again: ‘green-collar jobs’ are the only hope we have in reviving the American economy any time soon. We must begin to consciously build societies and nations which are much more environmentally and ecologically sustainable in the very long-term. These ‘green-collar jobs’ should serve to clean-up and repair the massive environmental damage and mess which we have created in the last 100+ years of feverishly disorganized and reckless mass-industrialization, urbanization/suburbanization, and over-mechanization.

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