Martin Wolf: "This Way Lies a Catastrophe"

Oof, that key phrase in Martin Wolf’s column in the Financial Times, “Why Davos Man is waiting for Obama to save him,” is only slightly more cheery than, “Abandon all hope, ye who enter here.”

Wolf gives a quick recap of Davos, recent international economic forecasts and market developments, which is worth reading, and then moves to recommendations:

The lead must come from the US: it remains the hyperpower; the economic system is one it promoted; and the crisis had much to do with mistakes its policymakers and private institutions made, even if aided and abetted by mistakes elsewhere.

So what are the principles to be followed? I suggest the following:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

Third, make future normalisation of fiscal and monetary policies credible.

Fourth, act in concert. Even the US cannot solve its problems alone.

Fifth, avoid protectionism.

Sixth, strengthen the ability of global institutions to help the weaker.

So how are we doing against these standards? “Better than in the 1930s” is the best one can say. The world desperately needs Mr Obama to take a firmer grip at home and lead abroad. The plans he is now announcing give him a chance of doing the former. The April summit of the Group of 20 countries, in London, is his chance for achieving the latter.

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”. Instead of acting as a global leader, there is resort to protectionism and a “blame game”.

This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas. Their accumulated foreign currency reserves of the 2000s will help. But the resources available to the IMF, even with their hoped-for doubling, are too small to give most emerging economies the confidence they need to risk keeping their spending up.

Decisions taken in the next few months will shape the world for a generation. If we get through this crisis without collapse, we will have the time and the chance to construct a better and more stable global order. If we do not, that opportunity may not recur for decades.

We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed.

It is troubling (bur probably correct) that Wolf sees no alternative to US leadership in this arena. In all honesty, even if we attempted to exercise it, I doubt we’d get consent. The big theme of Davos was anger against the wreckage Wall Street hath wrought, and how our economic models and prescriptions had failed. And Obama did not help build bridges via his surprising failure to send a reasonably senior emissary. No one would dare to try beat up on Paul Volcker, and not having played a role in creating the current mess, he could credibly condemn it while suggesting ways forward.

Even if we miraculously rebuilt our credibility by leashing and collaring the miscreants, would it be enough to restore trust? The other subtext of Davos was badly frayed nerves and a lack of cooperative spirit. That isn’t good even in more normal times.

It would be far better if I were proven wrong, but Wolf is pessimistic based on what he has seen thus far, and I am even more so.

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  1. Anonymous

    Great post again, Yves!

    Maybe it’s too early, but maybe it’s time to consider, or “role play”, how a U.S. collapse later this year or next, would play out. How would this effect treasuries, commodities, the dollar, stocks, bonds, and international trade. Any thoughts?

  2. k

    The horse has already left the barn. We are doomed.

    The rational choice for each country is to save itself. Yes, it will lead to collective destruction, but all the joint effort so far has led us to nowhere, so how can it be different this time?

  3. mft

    No, Yves, you’re wrong (for once). It’s not a question of consent. In times of trial like the present, it is only important that the rest of the world follow a convincing leadership, not that they cease to grumble or are entirely convinced it’s going to work.

    That means President Obama has to use his amazing rhetorical gift to (1) acknowledge the harm done by US policy in the past, (2) present a blueprint for a just world economic order, and (3) make solidarity among the nations of the world in confronting this crisis so self-evidently essential that no-one dares step out of line, even if they are not entirely convinced.

    The practical measures are secondary. Everybody knows what they need to be (bank nationalization, international coordination on credit expansion and fiscal measures) and the details don’t really matter – it’s the political will and the establishment of confidence in political leadership that matters. (Even Wen Ji Bao put this up front in his FT interview.)

    Obama has the great advantage that he is not tainted by the mistakes of the past, even though he is now US president. I am amazed that he has not yet realized what his role has to be.

  4. alexblack

    Really, if political leaders face a choice of “doing the right thing for all nations” versus “doing whatever the voters back home, who are demanding we do whatever we have to do to save THEIR asses, and the hell with the others”, how do you think they will choose? Ever read a history book?

    Everyone will do what they have to do to stay in power. This will not simply become “beggar thy neighbor” This will become “demagogue they neighbor”, laying off as much blame as one can, directing the ire one’s constituents towards others, just for mere political survival. Cannonballs are already being shot over each others bows – Geithner blaming the Chinese, everyone else on Earth blaming the Americans…. This is the first inning, where everyone is still playing nice. I think we’ll see bench-clearing brawls by the fourth inning or so.

    And how will this affect stocks, bonds, commodities, treasuries…? People will spend more time making sure they have food and heat than they will wondering where the Dow is.

  5. Yves Smith


    With all due respect, I beg to differ, The party that we most need to follow our lead is China, and Wen Jinboa made it obvious at Davos that he is not on board at all with the US characterization of the problem. He also made it abundantly clear (to quote Nixon) that China can and will manage things on its own, thank you very much.

    I’m not sure it was ever possible to agree on a common course of action with China, but Team Obama got off on a very bad footing by issuing broadsides before even having any inconclusive private wranglings.

    I am not sure the Germans will follow either, they are following their own drummer too. With two of the biggest surplus nations not on board, it doesn’t matter much if we get everyone else in alignment (even if that could be done, mind you). Their participation is key.

  6. Anonymous

    What would a “shock and awe” stimulus package look like. 3 or 4 trillion? 10 or 15 trillion? Turns out it is not quite that easy to figure out how to spend even 800 billion. One thing that needs to be addressed. To what extent does the Keynesian point of origin for this idea of stimulus encourage intellectual slovenliness. After all, Keynes’ argument for stimulus does not envision that the stimulus should be productive or profitable. This is the fin de siecle. The twilight of the brights. One might take it as proof of the existence of God that the Marxist superstition collapsed prior to this crisis.

  7. patrick neid

    “The big theme of Davos was anger against the wreckage Wall Street hath wrought, and how our economic models and prescriptions had failed.”

    As usual they didn’t have a clue at Davos.

  8. Anonymous

    It was like doctors standing around the patient they killed and came to the conclusion that it, had NO WILL to live, there fore there was nothing for them to do but call in Dr Frankenstein.

    Now which jar did Egor fetch for the transplant, abby who, oooh yes now I remember, abby normal.


  9. donebenson

    I tend to agree with Patrick Neid, who said that Davos ‘doesn’t have a clue.’ Relative to economics, it’s as effective as the United Nations is for world politics.

    Despite the evidence from Reinhart and Rogoff, and the IMF, our politicians are firmly committed to doing the wrong thing, and as Yves points out, are handmaidens of Wall Street, and the bankrupt financial system.

    It is really discouraging to think of all the political and economic incompetency in the face of what George Soros said are the even more difficult times facing Barack Obama, then those that faced FDR on his initial inauguration.

  10. Anonymous

    anybody whose policy prescriptions include proping up demand as an across the board solution IMO hasn’t figured out what the problem is and doesn’t even deserve the time of day. In the US the problem is that consumption was too high and the lower level of demand is not not something that needs to be “stimulated” but rather adjusted to. The problem of China is one of demand given their very high savings rate. A stimulus by the government on additonal “investment projects” is exactly the wrong thing. What Taiwan did by giving its citizens a spending voucher is creative and exactly right.

  11. Dan

    “First, focus all attention on reversing the collapse in demand now”

    Why are these analysts totally unable to use the phrase “increase income”? Why does that scare them so? The ONLY WAY demand is going to increase is for income to rise, or prices to fall. Period. And since governments are hell-bent on avoiding deflation (which is beneficial to the masses and detrimental to the wealthy), that leaves the issue of income. Nobody’s discussing how to increase income.

    “Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.”

    That sounds, frankly, stupid. Why would that necessarily work? Isn’t it possible that would makes things worse? “Shock and awe” is a media phrase with no intellectual substance behind it; anyone with a brain should avoid using it.

    “Fifth, avoid protectionism.”

    That is propaganda designed to enrich the .5% at the top. We can see what free trade has wrought, and it’s a disaster; no industrial base in the U.S. today. We were fed a line that the U.S. could make it as a “services economy.” Yeah, right.

    Mr. Wolf, I give your “solutions” a grade of D-!

  12. Bourning Markets

    I agree with Ives' last comment. Two can't dance tango if one is not willing. In my (european, spanish) view, the US credibility right now has not to do so much with Wall Street but with Obama leadership and change, and I think many people in european main street would endorse a global response led by Obama. But then you have some Obama administration steps and some other's steps not promising at all. The two key tools are fixing financials and fiscal stimulus. Let's see. FISCAL COORDINATED STIMULUS: Let's go beyond the yes/no debate, as it is going to be implemented anyway. The key point here are fiscal spillovers in today's globalized world. There are a couple of simulation exercises, by IMF
    and by OECD
    The last shows that any individual country gets more benefit with a concerted effort. Then, first we have Germans opposing fiscal policy, then Geithner on China and renminbi, then the Buy American provision… I got some point from Krugman's recent post about protectionism: he recognizes that coordinated fiscal stimulus would be better off, but "that's not happening" (…so US have to resort to second "best": protect your fiscal effort). Understandable, while still disappointing and dangerous. As often is the case, any commercial protectionism retaliations will be blamed on the US but as I see, that mess would be a shared failure. And Merkel sound hypocrite to me, asking the US not being protectionist but not willing to make a fiscal effort. Only that I would expect more from Obama. All this sounds like they have had some "discrete talks" instead of global leadership i.e. having Obama (or some senior of his) putting the case on public, endorsed by IMF and OECD, at Davos, at G20, and then having germans opposing publicly if they dare to.
    FINANCIAL MESS: I like nacionalitation à la Swedish. Seemingly it works, banks and taxpayers interest gets aligned, and I think swedish have not converted to bolchevism. But may be this has too much stigma attached for the US to swallow, and/or is unfeasible. So here I can only hope that bad banks and guarantees work, and some credit normalcy resumes-to the extent that real economy recession permits.
    THE WOLE PICTURE… same feelings as Wolf. The whole thing (not just in the US, but in the world) still has too much japanese 90s flavour for me, i.e. delaying financial clean up and applying little and bad fiscal estimulus (Adam Posen on japanese stimulus:
    And also sharing the feeling that a good global opportunity might be wasted.

  13. lineup32

    The world via the USA financial structure has created the largest excess credit expansion in history and Martin and others think that the US can somehow create a short term policy that can right the ship. Crazy thinking!!!

  14. Anonymous

    Why should Obama have sent a senior representative?

    Davos is a joke out here in the real world, an obscenely elite costume show, with preening billionaires pretending to understand how societies work when all they know is their tiny little vertical and a few inches on either side.

    Your kowtowing to the myth of this conference is disturbing.

    – David Mercanus

  15. Anonymous

    That means President Obama has to use his amazing rhetorical gift

    Usually a gift for rhetoric is a sign that the person has no gift for observing things as they really are.

  16. Tortoise

    No, no, no!

    Kudos to Patrick for his remark: “As usual they didn’t have a clue at Davos.” I am afraid that Martin Wolf is clueless as well. Now is the time to fix some structural problems.

    Folks, why so much despair? We are in a deep recession, to be sure, but this is how this system works. The patient is in bed and running a fever but this does not mean than he will die. Some symptoms are only showing that his system is fighting the infection. Getting the patient over-drugged with stupefying sedatives is not recommended. The medicines we need probably taste bitter and take some time to work.

  17. Anonymous

    Disagree that the global architecture is a second-order problem. Without transparency and anti-corruption measures banking recapitalization will simply be looted, just as the fraudulent banking profits have been. Any bank that takes capital has to be brought under a multilateral regulatory regime – multilateral to avoid regulatory capture by US banks. That slows things up, true, but the alternative is shoveling money into a furnace. If multilateral regulation can only be implemented regionally, without US participation, that’s fine too.

  18. Bourning Markets

    Yes/No debate… Do nothing…

    “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” (JMK)

    Well, not even Hayek or Robbins would support a “do nothing” approach. Even Hayek and Robbins bitterly repented of their positions in the 30s.

    Hayek (1975) quoted in Larry White’s, emphasis mine:

    “I am the last to deny – or rather, I am today the last to deny – that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate. I probably ought to add a word of explanation: I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should have even then understood that this possibility no longer existed. … I would no longer maintain, as I did in the early ‘30s, that for this reason, and for this reason only, a short period of deflation might be desirable. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation.

    So well, maybe I am as clueless as anyone else. This is a Holy Mess for everyone, so it is possible. But my choice is to disregard deflation and uncontrolled liquidationism as having any benefit for anyone and to respect those clueless like Hayek and Robbins, along with those other ones like Keynes, Friedman, Wolf, Krugman and the rest. To me, something can and should be tried and the question goes beyond that yes/no debate, but it is how to do it right or wrong.

  19. Tortoise

    I am not suggesting that we should do nothing. Au contraire. There are a lot of very tough problems to be solved or at least addressed. If we are to spend money to stimulate the economy, let us at least solve these problems. But looking at what has been done so far and what is suggested to be done is not encouraging.

    We have supported banks so that they can continue lending. This is absurd! A lot of the banks and financial-service companies deserve to go bankrupt. They are not needed and can easily be replaced. And lending money at exorbitant rates to people who cannot afford to pay back is stupid and immoral. In better days, this practice used to be called loan-sharking and was a punishable crime. We have spent inordinate amounts of tax-payer money with the justification that this will allow banks to continue this practice. In the process, we transfer money from the gullible poor to the connected rich (usually in the name of supporting the weak)!

  20. Anonymous

    central banks cannot save the economy, should not even want to save the economy, see what happened with greenspan, central banks should do price stability only

  21. Bourning Markets

    @ Tortoise. I agree. Measures dealing with the financial side of the problem are not really encouraging so far. And not only in the States. I know sweedish style nacionalization works. Governments are far from being ideal managers, but they have not leveraged x30 in risky assets! N would stop the divorce between taxpayers and bankers interests. The alternative path of bad bank and guarantees… I just don’t know. Let’s hope it works. Anyway, just letting them fail is not an option. The question is how to do it securing taxpayers money. In past finantial crisis, according to Reinhart&Rogoff, bailouts have not been the lion’s share in public debt increase. But now, again, I just don’t know.

    Even taking aside the stigma about nationalization, probably there are more practical obstacles to adopt that radical surgery.

    Let’s take that nice black hole of AIG for example. You just can’t let it go bankrupt because, besides the damage to the US, you have all those marvelous CDS suscribed by AIG for european banks to become happily leveraged. Would the US respond for the CDS in the balance sheets of european banks? Things like this, you know.

    In sum, I suspect that in dealing with the financial mess there are national and international issues and conflicts interwined, adding up to this apparent hesitance and missteps -at the States and abroad as well- in dealing with the financial side of the problem. (Japan 90 flavour, again). Things that are not openly discussed. Well, at least, the more I learn, the less I know. Some Philippe Marlow welcomed.

  22. Lune

    I agree with Dan on all his points, and would add further:

    As for whether Obama should take concerted action: at the risk of sounding parochial, Obama is *my* president, not Mr. Wolf’s. If America’s interests are best served by global cooperation and concerted action, then Obama should certainly pursue that. But if saving America requires the UK to go the way of Iceland, well…

    My point is Mr. Wolf’s prescriptions sound like an admonition to save America by saving the world. While that can work sometimes (witness the Marshall Plan and NATO), it hasn’t yet been proven in this situation.

    IMHO, I do believe global concerted action is perhaps the best way to go, but the temptation to “cheat” (i.e. pursue your own agenda while everyone else pursues a shared plan) will be too great for countries to bear (a classic prisoner’s dilemma situation).

    The last thing I want to see is every other country (e.g. China, Germany, Japan) pursue their own interests while exhorting America to spend trillions on saving the global system. Unless there are strong guarantees that that won’t happen, global concerted action is a fool’s game.

  23. Anonymous

    Most of the comments seem predicated on the notion that Obama wants and/or is capable of doing the right thing (whatever that might be); there is no evidence whatsoever that he has any interests in doing so even if doing so were possible. the horse is out of the barn gang.

  24. marin belge™

    The content of your post is great. Martin Wolf text, with all due respect, is complete of the mark not to say goofy. All we should expect from British economists is a high level of modesty. He is certainly not displaying any. Already getting a French saver on the nerves. Just try to get your the point to a Dutch German one… Let alone a Chinese worker.

    Even if we miraculously rebuilt Wour credibility by leashing and collaring the miscreants, would it be enough to restore trust?

    We all expected the Great US justice in action. As for Enron but on a greater scale. No way that it would solve the problem. But it would certainly enhance US international position. What we have is an Obama administration filled with people who should not be there. And what is worse an independent judiciary sleeping at the wheel. AMHA, the international financial system aka “monetary system” will be out of control by the end of the year… I’d like so much to be wrong. Dammed wrong.

  25. Tortoise

    @Bourning Markets, allow me to question the premise “You just can’t let [AIG] go bankrupt …” Now, we have let millions of retirees lose what they were either promised or they though they had in their pension funds (e.g., ENRON, airline pilots, etc.) and essentially said “tough luck, that’s how the cookie crumbles …” We seem willing to let the automobile industry go bankrupt like the textile and other industries before it.

    AIG and their counter-parties took huge financial risks and benefited handsomely while causing a lot of dislocation to others. Now that, predictably, they got in serious trouble, they MUST be saved? On what basis? It cannot be the misery, because we have not cared in the past so why should we care now? It cannot be their irreplaceable technology, since we are talking about really low-tech that can be replaced in a jiffy.

    The myth that the real economy is critically dependent on the financial sphere is just that, a myth. On the basis of that myth, we are willing to accept all kinds of absurdities as starvation when there is overproduction of food, or homelessness when there is abundance of construction materials and workers. These are all distortions caused by an extremely egoistical, malfunctioning, often malfeasant, but extremely powerful financial system. Their high technology is in how skillfully they can influence the public opinion and power centers.

  26. S

    What exactlyu does shock and awe mean? This is the kind of stuff that disqualifies anything that precedes or follows it. Wolf obviously has something in mind, so what exactly is it?

  27. mft

    Yves, you’ve been so insistent on how Wen Jiabao at Davos made it obvious that China is not going to follow any US lead, that I’ve just spent an hour listening to the entire speech, and I really can’t see what you’re getting at. Wen Jiabao’s central point is the need to restore confidence, and the role of international cooperation (especially China-US cooperation, right at the end) in doing that. He spends half his talk on China’s macroeconomic measures – you interpret this as making it “abundantly clear … that China can and will manage things on its own”. No, for Heaven’s sake! He expressly presents this as China’s contribution to global efforts to deal with the crisis!

    International cooperation is anyway not primarily about fiscal stimulus. So far as we can tell, China is doing a lot, but it and the rest of the surplus countries can never ever grow their domestic demand to the extent needed to replace lost US demand. That’s a big illusion that many are clinging to although the real figures were out long ago. But at the same time, this shows once again where the problem lies. Nobody (and of course that goes for Germany too) is going to saddle the next generation with tons of debt if they think everyone else is going to get a free ride. That’s why it can only be done on an international scale, through international institutions. And that is why we need leadership from the US!

  28. mxq

    “So far as we can tell, China is doing a lot, but it and the rest of the surplus countries can never ever grow their domestic demand to the extent needed to replace lost US demand.”

    Well, they can start by letting their currencies float. read the setser post in the links from yesterday. I have a feeling the surfeit of US financial service companies is directly proportionate to the glut of asian (in particular chinese) exporting capacity. That’s where the US needs to cooperate with China.

    China needs to be doing special deals with the US to import some US goods (not just the EU). I have no idea why they won’t let the currency float so as to facilitate a better lifestyle for its people.

    Of course china and asia can’t support the rest of the world alone…but they can always start. But i have a feeling (like the US financial system) its going to take a catastrophe to effect a change in the way asia recycles its surpluses.

  29. David Brown

    The problem with the stimulus is that with only $400 billion or so of real fiscal stimulus (tax cuts will have little stimulus effect), state and local government budget cuts will be roughly equal to the new fed expenditures. No net stimulus.

  30. Yves Smith


    With all due respect, i beg to differ, and mxq is on the mark. This is all an indirect response to the Geither point on China letting the RMB rise further that provoked such a firestorm of criticism from China.

    Similarly, the stimulus measures in China (so far) are far far less than the headline numbers suggest. Analysts who have pored through the details say only 1/6 to 20% is actually new spending. The rest was already budgeted, but reheated and combined with new programs to make it sound better. And of the new spending, most of it is in the second year. Much much less stimulus than meets the eye.

    And the speech about cooperation is actually a dig at Team Obama too:

    “A peaceful and harmonious bilateral relationship between these two countries will make both winners,” Wen said. “A confrontational one will make both losers.”

    This is all code for “back off on the currency bashing.”

  31. mxq

    re: fiscal stimulus…there was a good quote i read today…a long-time China analyst said:

    “Since the Chinese government accounts for only some 20% of GDP, “how it will make up for a slowdown in the other 80% is beyond me.”

    not to mention that 20% is being generous…

  32. Southern Agrarian

    “First, focus all attention on reversing the collapse in demand now…”

    There is nothing that will reduce the collapse in demand in America and other highly industrialized nations because the people (the vast majority, at least) there already have all of the material possessions that they need…PLUS more. We’ve been encouraged to be consumers instead of citizens, and thus our society is drowing in debt as people bought a bunch of junk they didn’t really need to try and fill a void that can only be filled by building communities and relationships, appreciating nature, being creative, etc. Instead of propping up hyperconsumption and continuing to seriously pollute the Earth for more plastic or electronic widgets which we DON’T AT ALL NEED we should work to improve upon the most important things in life like smart/good housing and community cohesion, food, leisure, education, and social connections because we already have the problem of production of goods mastered here in The West. Time for a new era.

    The only thing to do anything really immediate would be to help to modernize and improve 2nd and 3rd world countries so that they can increase demand for all kinds of consumer goods in their vastly underserved markets…but I don’t think they’d like a bunch of ‘do gooder’ Westerners or foreigners coming in to their country and telling them what to build and buy because we want to “help them” be richer and more materialistic…they’d see us more as imperialists than anything.

    We are smothering under the weight of our own affluence and overabundance. This is a crisis of overproduction and saturated Western domestic markets, if anything. Hyperindustrialism has outpaced the ability of humans to adjust to it correctly.

    – Southern Agrarians:

  33. Richard Kline

    We are ever on the cusp o’ history, Mart m’ man: tomorrow is another day. Tho’ if today we burn the house down we’ll sleep under the stars for a time, but.

    Regarding Wolf’s Six Points, I agree with them broadly, some more than others. The one regarding which he and I differ most I’ll return to below. First, let’s get some context on his Screed O’ Doom. He is a Brit, and this perspective is one from within the UK. For the UK, this crisis indeed looms as the Endtime; it’s over. The pound is heading toward an ounce, and regretably not the kind one can smoke, either. The Empire had already shrunk to property, the City, and an impeccable sense of diction. The holders of the first two theived the kitty, played the casino with the lolly, and thus those possessing the last are, in a fine old English phrase, ruined. The UK is too big for the IMF, and so must find a white knight backer or face the magistrates of the Continent, speaking metaphorically. This is . . . distasteful. And so to them especially, the initial fecklessness of the planners of Bo Prez can only be supremely disappointing. Twice over the last three generations, the Yanks have Come Over to save the Brits when muddling through wasn’t on. Clearly they’ve been hoping for third time’s the charm, the ‘special relationship’ is still in, that as Lords Deputy to the Hyperpower [sic] they would be redeemed while others were consigned to the hulks. Not so, it would seem. . . . Pity (or not).

    The entire idea of the US as a ‘hyperpower’ is deeply fallacious, but that is another comment. As with Yves, I see the ability of the US to ‘lead’ out of the present crisis as, to be kind, impaired. Collective action is essential, but Wolf does stress that, and I moreso.

    Where I differ with Wolf, in degree not in kind, is with regard to the focus on overwhelming stimulus. Now, something which all those arguing for The Big Boost have exactly right is that demand collapses trigger very deep, and very abrupt, output troughs. The historical record on this is clear, and the economic processes are fairly straightforward and, as such things go, well understood. We are manifestly inside the event horizon of an historically severe demand collapse, ergo we are headed for a fall unless Gawd-or-Superman reaches out and kicks our saggy-sorry ass back in the window from which we’ve fallen. No one wants to take a hard fall, whether from the 17th floor—as [to me] Krugman and Wolf would see it, or from the 4th floor as I would more nearly see it. “Save our way of life,” booms Krug, and from the Vessel of Britain slipping under shrieks Wolf.

    Um, no. Our way of life for a generation has been borrow and spend. Economists calling for stimulus have a point, but the idea that all ‘developed economies’ can practice stimulative policies _in an ongoing fashion_ whenever they feel their ‘growth’ is subpar is wrong, destructive, and exactly how we have gotten where we are. Economies CANNNNOTT grow, indefinitely. The globe as a whole cannot stimulate collectively without severe bubbles and deeper collapses. At some point, sustainability and prudence have to come into effect, if only as a last resort as will surely be the case this time out too. Because the alternative is, in fact, a crash deep enough to cause population collapse. These have happened locally; never globally, but we reach, what’s the phrase?, the limits of growth.

    To the extent to which a Hyperstimulus is rammed through now, and sort of works, it works simply to keep us keepin’ on with what we’ve been up to for the last century. More of the same. Overbuild; overextract; overleverage; overpay; over time, the crash at the end just gets bigger, that way. I’m not in favor of sorta stimulating our way back on the path of profligacy. Which is what stimulus will get us _in the present context_ one may be sure. We will have few reforms attempted, and if stimulus gets any traction even those will be swept aside. Because Growth Pays Upfront whereas sustainability works Down the Road, and the World has been all about right now for at least two generations.

    Sufficient economic stimulus to keep the trough of demand collapse to a demand _decline_ is, to me, desireable. Whether it is possible is another story; I am dubious, but the effort cannot be denied as a prudent one. But trying to goose our way back to 2004 or 1998 or 1986 kinds of ‘growth’ simply means that we will get to recapitulate 2006 kinds of cancer, quite possibly in more virulent form. The first step to real reform is to acknowledge that returning to the recent past is like punching the spike back in and saying, “Hit me again, I feel luc-ckk-ky.” Folks sitting where Krugman and Wolf sit don’t see it that way: to them, the recent past was pretty decent. For me, the problem is that the recent past has an inescapable trajectory to the immediate crisis, and I don’t want to simply repeat this again in seven or fifteen years. Rather than try to recapture what is lost, let’s make a new plan; not a New Deal but a Better Wheel.

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