The Great Depression II meme

Submitted by Edward Harrison of the site Credit Writedowns.

Last night I wrote an article reminding you that downside risk remains in the global economy. While I have been singing a more bullish tune in regards to the prospect of a technical recovery in 2009, I am concerned about a double dip as a likely outcome.

And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post “The Fake Recovery”).

The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal. Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week. In the past, one had seen these two series as harbingers of imminent recovery. But, I am talking Q4 here. Why? Deleveraging.

In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment. Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless. This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop. In my view, this means recovery will be delayed and once it gets going it will be weak. The potential for a double dip is very high.

So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough. But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.

The major reason I see a double dip as more likely than not is the policy response. The Munchau post I highlighted last night certainly should leave you with the impression that policy makers are not taking continued downside risk very seriously. But, I tend to see this as very much a predictable outcome. Back in November I wrote a post called “Beware of deficit hawks” in which I argued that a now-we-can-normalize-policy meme was sure to take hold as soon as the first signs of recovery appeared.

Recently, deficit hawks have been pushing a nefarious line of argument that I need to debunk right here and right now. The line goes as follows: we need to spend government monies now to get the economy back on its feet. In a couple of years, we can signal all clear and then raise taxes on the middle class in order to reduce the deficit again, much as we did in 1993.

While I agree that deficits will need to be eliminated, this line of thinking risks a repeat of 1937-38 in the U.S. and 1997 in Japan and must be refuted.

This line of argument, entirely predictable, does seem to be exactly what is taking place right now. Witness Paul Krugman’s remarks in his most recent post Stay the Course.

The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.

or this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession…

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again.

You will notice that Krugman is making the exact point I made seven months ago – testimony to how inevitable this all is. I suggest you read his post in full because his arguments need to be taken seriously if we are to avoid a repeat of 1937 and 1997. Quite frankly, I am not particularly optimistic that we are going to see policy makers stay the course. After all, the budget deficits in the U.K., the U.S., and Ireland (to name three of the four original bubble economies – Spain is the other) are exploding. Willem Buiter has already warned that the U.K. and the U.S. cannot credibly maintain these deficits (see his U.K. post here and U.S. post here).

Pre-Lehman, I was very much in the deficit hawk camp (see my post “Confessions of an Austrian Economist”). But, those days are over, Lehman’s bankruptcy was the shock that guaranteed a debt deflationary outcome in the U.S. and for the global financial system. If we are to deleverage, credit is going to contract and that will mean recession. The only way to avoid this – and a potentially destabilizing deflationary spiral – is for government to temporarily fill in the gap until we reach a sustainable point of recovery. We are nowhere near that point now. I warned in November that

…the Obama administration is going to be beset by parties using the immediate deficit reduction line of argument: Can we really balloon the deficit to $1 trillion and expect business as usual in 4 to 5 years given the precedents and given the low savings and high debt?

My answer is no. 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. While all of this is still a number of years off, we need to nip this talk in the bud now before it becomes orthodoxy.

Buiter’s view of the U.S. and the U.K. as Banana Republics demonstrates that there really aren’t very many policy options available here. But, that is the outcome of years of bubbles and unbalanced growth. Think of the United States as Argentina or Latvia writ large. The U.S. does need to demonstrate a longer-term path to fiscal policy normalization to maintain investor confidence. This is something that is not happening. (see David Leohardt’s piece from last week).

Going forward, in all likelihood, we are going to see a move toward fiscal prudence and policy normalization. Stimulus will be seen as irresponsible. This is already the view amongst many politicians in the U.K., the U.S., and Germany (and the Czechs have been making the same noises in Central Europe). So, when the U.S. and global economy relapse into depression because we did not stay the course, you will know why.

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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. Anon1


    Anyway, I just don't understand the idea of "recovery". What will so-called "recovery" be based upon? The service industry? Is everyone in the US who isn't in finance supposed to become hotel maids, waiters/waitresses, butlers, Wal-Mart door greeters, and cashiers? Precisely what is there in the USA to based an economy upon that doesn't merely require that everyone borrow up to their necks (using, once again, their homes as ATMs) to buy stuff they cannot actually afford nor need? What is the recovered economy to be based upon?

    Seriously. What is there?

  2. Moses Kim

    Roubini is right, except 2010 will feel more like a Depression.

    I must respectfully disagree with your view that the Government should temporarily spend its way out of this crisis. Greenspan's policies directly led to the current crisis, and reckless spending right now will guarantee an even greater crisis in the future. The Austrians had it right: let the failed companies fail, and clean the system once and for all.

  3. Edward Harrison

    Moses, I appreciate your respectful tone. I do feel conflicted about the call for stimulus – and so understand your concerns. In due course, we will see policy makers make a definitive choice and the repurcussions will be plain to all. I hope they choose wisely.

  4. Brick

    I Suspect real recovery will come from one of three places. Innovation, market consolidation, or emerging market growth. Since there have not been serious steps to bolster innovation and zombie companies have hindered consolidation that leaves emerging markets and I would be looking to India there.
    It is perhaps a misunderstanding that those who propose a better balanced fiscal policy are asking for the stimulus plug to be pulled. What is wrong with refocusing current spending as a starting point, apart from upsetting a few politicians pet projects. Just how much of the recent fiscal stimulus could have been better spent in the economy?
    The trick is to get the right balance of stimulus to the real economy, and debt load. Neither throwing money at everything but the real economy nor spending until creditors pull the plug seem sensible options.

  5. Anon1

    Moses, I must disagree in part. I do not see stimulus spending as meaning, in any way, bailing out banks and other criminal organizations. I see stimulus spending, done properly, as spending from the bottom up rather than trying to feed trickle down (piss down is more accurate).

    Spending must occur on infrastructure (Remember any bridge collapses recently? Want more?): road and bridge REPAIR and maintenance (not new roads and bridges), NEW passenger rail track separate from the crappy freight track it depends upon now, new/more passenger rail in municipalities and across the nation to help get people out of cars, off the highways, and into more eco-friendly and efficient means of travel, investment spending on alternative energy instead of continuing with coal/oil, MORE funding for college education, etc.

    Do NOT spend on billionaires, banks, and hedge funds. Screw them.

    CUT military spending and quite most of our 750+ overseas military bases. We'd save billions a year AND still be be spending more than any possible opponent even if we cut "defense" spending (yeah, right, defense) by 50% for starters. Cut all corporate subsidies including agribusiness support. Increase taxes back to what they were on the upper income levels BEFORE Bush/Cheney came along. Then slowly ratchet them back up to where they were under Reagan, at least. They'd STILL be rich, fat, dumb, greedy, and "happy" but they would be paying back into society rather than leeching off of it as if they are some entitled aristocracy.

  6. Moses Kim


    You are correct, stimulus spending is not the same as bailing out banks and other failed institutions. However, bailouts and other "rescue" programs are crowding out spending that could be used for more productive purposes — many of which you named. Effectively, taxpayers are getting screwed either way.

  7. redst8r

    You referred to: "… – and a potentially destabilizing deflationary spiral – …"

    Many have used this as the rationale for the ongoing and massive "stimulus" spending and multi-trillion dollar deficits over the next few years. Yet I have never seen a description of this process.

    That is, you indicated the collapse of Lehmann was the trigger for you to swing from a deficit hawk to (what I guess is) a deficit dove.

    If the government had not bailed out Goldman, Morgan, Citi, BofA et. al how would our current economic situation be different? Excluding the obvious that more financial industry workers would be out of a job – but not likely that many!

    How much worse off would we be? And just why is a deflationary spiral so terrible after so many decades of inflationary spirals that brutally penalized savers and investors?

    I'm still trying to find out what the so-called financial domino effect would have been and why it was so important to prevent that instead of having government around afterwards ready to provide assistance to affected individuals.

  8. Edward Harrison


    you ask a good question because many people are conflating stimulus with bailout and that is something I would like to avoid. There are three five separate issues:

    1. bailouts aka crony capitalism
    2. monetary stimulus in the form of low interest rates,
    3. monetary stimulus in the form of quantitative easing aka printing money
    4. monetary stimulus in the form of qualitative easing
    5. fiscal stimulus

    I would say that I generally reject the first 4 for various reasons. #1 leads to moral hazard and the last three are inflationary, bubble-inducing mechanisms. That leaves you with #5, fiscal stimulus. Why is this important?

    If we had zero stimulus, the reduction in credit availability would induce a contraction in credit which would reduce real economic output which would destroy capital leading to writedowns and a further reduction in credit in a downward spiral. There would be a significant dead-weight loss from such a spiral. This is what we saw in the Great Depression.

    So the question is what can be done to arrest this self-reinforcing dynamic. I answer that question in my post "A brief philosophical argument about the role of government, stimulus and recession."

  9. Edward Harrison

    Oh and as for bailouts, I think we should have seized bankrupt institutions rather than bailing them out at taxpayer expense.

  10. Voislav

    The main problem that is see right now is "if you build it they will come" attitude, where a lot of money is going to be wasted on infrastructure projects that have marginal impact on the economy. The key to the recovery will be the revival of the manufacturing industry, either by returning offshored jobs or developing new industry. It would balance the trade, reduce unemployment and increase the tax base.
    The problem I see is that the administration is taking a very short-term view of this crisis. There are no plans to spur the growth of new domestic industry, most of the stimulus money is going to existing industries, such as construction and banking, in order to preserve overcapacity developed during the credit boom. So until something is done to revive industrial production, everything else is rearranging the chairs on the Titanic.

  11. DownSouth

    @Moses Kim and
    @Anon 1

    If history serves as any guide, neither the Austrians nor the Keynesians offer a credible solution for what ails the U.S.

    When Great Britain began its long decline in the 1860s, it was an Austrian/libertarian's wet dream–extremely low taxes (during the 1880s and 1890s public spending between 10 and 11% of national product, and more than 50% of tax revenues derived from consumption taxes so that the tax burden fell disporoportionatly upon the the poor and middle classes), extreme fiscal austerity (doles for both households and businesses were all but nonexistent, and of course there were no "bailouts"), national budgets were balanced with little public debt (for instance in 1887 total government expenditures were 87.4 million pounds and the debt stood at only 26.2 million pounds, and by 1900 the public debt had been reduced to a mere 19.8 million pounds), and the reign of free-trade and laissez-faire was all but absolute.

    And yet the economy ground inexorably downward, losing ground relative to the rest of the world.

    So the solution the Austrians offer is no panacea, unless one is willing to ignore or rewrite history.

    Keynesian spending worked for the U.S. in the 1930s (deficit social spending) and the 1940s (deficit military spending) because the U.S. emerged from WWII the most powerful nation in the world. Deficit spending, however, wasn't so kind to Great Britain. The cost of two world wars with a Depression sandwiched in between left the country heavily indebted, and Britain lost its preeminent position in the world.

    Tolstoy in War and Peace observed that:

    The human mind cannot grasp the causes of phenomenona in the aggregate. But the need to find these causes is inherent in man's soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause and says: "This is the cause!"

    I think that people also tend to grasp upon that cause that bolsters or justifies their ideology. As Rienhold Niebuhr observed in "Ideology and the Scientific Method":

    Any social theory therefore has some kinship with the procedures of a Rorschach test, which is more revealing about the state of the patient's mind who makes it than about the inkspots which his imagination interprets in terms of various configurations.

    Is there any policy Great Britain could have followed to arrest its decline? I suspect there was not. My belief is that Britain's rise to world prominence, as well as it's decline (and by comparison also those of the U.S.) were due much more to developments that lay outside the nation's control than within. Aaron L. Friedberg in The Weary Titan gives but one example:

    By the second half of the (19th) century, however, the opening of vast areas of the American plains to cultivation and the development of railroads and refrigerator ships to bring goods to market were helping drive high-cost British producers of grain and meat out of business.

    British exceptionalism did not die an easy death, and I suspect American exceptionalism will not do so either.

  12. Paul

    Lehman’s bankruptcy was the shock that guaranteed a debt deflationary outcome in the U.S. and for the global financial system.
    I keep hearing this again and again, but can someone explain why a poorly run investment bank going BK causes a WW financial system meltdown?

    A simple but detailed explanation would be greatly appreciated.

  13. Edward Harrison


    I wrote this post the day after Lehman went bankrupt. It is not 100% prescient, but it does show that much of the deleveraging was wholly predictable:

    Lehman should have been seized or a framework to do so should have been worked out in advance to liquidate the firm without systemic risk (you will notice I am not arguing that it should have been bailed out).

    The timeframe between Bear and Lehman gave ample opportunity to deal with the fallout from a Lehman failure. But, free market ideology got in the way.

  14. Steak113

    Since we're only going off of two datapoints I would propose the following:

    Removing stimulus before structural changes are in place is what causes this double dip. In both instances of Japan & the GD, few of the hard choices had been made.

    I posit that countries that take their medicine early can cut their stimulus early and this debate of pulling the rug too soon is absurd. Since we're never going to make structural changes, whenever stimulus is removed (1-5-10 yrs from now) we will have the double dip. I further posit that removal of stimulus in those examples brought on the REAL crash that finally led to structural changes that never would have happened were the economies still on heroin.

  15. Matthew

    Isn't it possible that stimulus is appropriate for reserve-currency economies and not for those of weaker ones? Having lived in Central Europe for some time, it would seem to me that countries not using the Euro just aren't able to borrow to fund stimulus at the same rate as the USA or other nations with more stable currencies. Also taking into account the extremely high percentage of export in the GDP of countries like the Czech Republic, Poland, etc. isn't it reasonable to conclude that such countries should restrain from potentially disasterous levels of foreign currency debt? Never mind running up debt in their own currencies, which may not be supportable by the small tax bases which will not get too much bigger over a 5-15 year perspective…

  16. Hugh

    I agree with the post. I would say that Keynes worked in the Great Depression and that the lesson of 1937 is that fiscal stimulus needs to continue for as long as needed. I would also say that while initial fiscal stimulus is most easily applied to traditional infrastructure and companies, we should be thinking of a new sustainable industrial policy for the country and using stimulus as a bridge (or at least part of the bridge) to get us there.

  17. barnaby33

    Seems to me you are arguing a circle jerk. Unless we live beyond our means, we will back into recession. That is the very definition of unsustainable. Spending more money than we could reasonably collect in taxes (even including inflation) is what got us in this mess. The ONLY way out is to spend less, period. Eventually enough people will realize this. Unless of course you are in the camp that the govt can go on borrowing, ahem printing, money and shoving it down everyone's throat. This isn't just about near term spending. Its about the massive entitlement mentality that America has spent 3 generations building.

    If we have more deflation to undergo (I firmly believe we do) it is because we spent to freely and saved far too little. The sad thing is that not even the concerted efforts of global central banks will be enough to stop this, though they will destroy what is left of the middle class trying.

  18. Richard

    Edward, your work in this field is excellent, but allow me to make an ideological objection: you may be making the mistake that an economic recovery is the primary goal of policymakers within the government, and especially the Fed and the Treasury

    But there is an alternative, namely that the true goal is consolidation, an oligopolization of financial services, and through that, an even stronger grip upon the rest of the economy by them and the investors associated with them

    after all, policymakers have already made several important decisions that benefitted the financial sector, decisions that seemed pretty dubious from an economic standpoint, haven't they?

    so, if forced to choose between a possible "double dip" recession, but one that intensifies financial sector control over the economy, or pushing forward sustained economic growth that might threaten the permanent consolidation of their power, which one do they choose?

    in that case, then, maybe, a double dip recession isn't so bad

  19. biglefty

    The US did just fine before we had the Federal Reserve. Any over spending or over consumption was quickly corrected in recessions that lasted 2 years max.
    The Fed was created in 1913 and in just a few years we had the over stimulation of the 20's and the crash of 29.
    Seems the me the source of the problem is clear. The solution is obvious.
    All of this talk about staying the course of the stimulation is academic. There is absolutely no way to finance it and the world will not allow it. So I guess we need to prepare for what is needed anyway.

  20. JR

    Hi DownSouth,

    You brought a lot to the table there, but perhaps we could start with the basic stuff.

    Before dismissing the Austro-libertarian perspective as wrong or whatever else, you might be interested to learn what they think, and in particular why they do not consider conditions in 19th century England to have been "Austrian/libertarian's wet dream." In fact, they consider it the opposite.

    Hint – expansionary monetary policy is the anti-thesis of the free market.

  21. Leo Kolivakis

    Richard wrote:

    "But there is an alternative, namely that the true goal is consolidation, an oligopolization of financial services, and through that, an even stronger grip upon the rest of the economy by them and the investors associated with them."

    Bingo! You got that right, consolidation and concentration of power. It's exactly the Canadian model. In the U.S., you got way too many banks running amok and in Canada you essentially got an oligopoly of the Big Six. Sure we got tighter regulations but they have a tight grip on all financial services.



  22. DownSouth


    By all means, if Great Britain during the the 19th century did not live up to your idea of an Austrian/libertarian wet dream, please cite specifics as to why not. All the information I cited is from Aaron L. Friedberg's The Weary Titan: Britain and the Experice of Relative Decline.
    By the way, I failed to mention that Great Britain was on the gold standard at all times during the 19th century:

    There was an error in my earlier comment which I would like to correct. It should have read debt service amounted to only 26.2 million pounds in 1887 and by 1900 had fallen to 19.8 million pounds, the national debt having declined from 736.1 to 635.4 million pounds.

    I don't see how you could claim that Britain at any time during the 19th century had "an expansionary monetary policy," but like I said, I'm all ears.

  23. Detroit Dan

    Wow! DownSouth that was a tremendous post! I'll have to investigate Friedberg's book. Thank you.

    And thanks to Edward Harrison for getting this excellent discussion rolling…

  24. cpic

    I think it is important to understand we are in a D process as most of us do

    therefore when we fall from 100 to 92 and then bump up to 93.5 (this fall or spring) it is as much a recovery as it is the possibility it resembles a dead cat hitting a tree on the way down and bouncing

    i think (using the number's in the last paragraph) stimulus spending and re-stocking inventory's may cause the cat to bounce to "94-95" but i think the two keys to where we head in mid 2010 and beyond are (not to mention ecnomic strength dependent on more factors then pork spending goosing GDP)

    1. A increase of lending into real economy (small businesses)

    (CRE exposure will be a large drag on the smaller banks that had been lending)

    (we shall see IF Ben and the gang's continued velvet glove treatment of banking cartel expunges bad assets to give banks a incentive to lend)other wise awful employment and corporate earnings enviornment = less risky use of bank capital than lending

    2. THE PRODUCTIVITY of the DEBT going foward…….not into zombie banks but into Real pro growth strategy's as outlined by woody brock in "the end game draws nigh" great piece if you haven't read it

    You want to know what SADLY the real shape of this D process will likely be (minus some grand technological advancement) (or lobotomy on Politicians and non-elected Elite planners)

    picture exactly half a W then hang another half W from that and then flatline …edit (where the middle of W is half the peak of the beginning lol it shows up different when posted)

    where likely to be double dippin and the second dip will take us "significantly" below the trough of the first and then unless enough zombied out citizens raise a fist we may then truly welcome ourselves to the new normal….complete with a sobering two tier caste system

    I hope we get credit into the real economy and decide to pursue more aggressive stategy's that maximize the productivity of debt!

    what ya think edward

  25. Peripheral Visionary

    I think Voislav has the best comment thus far. There has been much talk about an eventual recovery, with precious little attention paid to just what that recovery might look like; at this point, it is a hope and nothing more. Hardly a basis for policy.

    Also agreed that stimulus has focused on maintaining inefficiencies rather than supporting new growth. This is a fine but very important distinction, and one politicians are not likely to get correct.

    Krugman et al.'s fear of a "double dip" recession may come to pass, but much sooner than expected, and without the expected trigger (sudden tightening). Rather, the economy may simply move down as it is recognized that the U.S. is no longer economically competitive and will continue to decline until deep structural changes are made, and that U.S. competitiveness is outside of the reach of government spending (which if anything worsens it by raising interest rates and taxes.) At that point, the expansionists will be out of options, and we will be facing the truly difficult choices: devaluing the currency, lowering wages, reducing regulation, cutting taxes, etc.

  26. Dan Duncan

    These historical comparisons are tedious.

    Looking back to the 1930s…or 19th Century Great Britain for that matter provides no useful template.

    OK, so G.B. was "exceptional" then and the US is "exceptional" now. In the 1930s, the gov't did X; it was unpleasant, therefore we should do Y.

    They were different cultures without speed of light communication…they didn't rely on oil like we do now…they didn't have nukes, nor did they have to contend with them…and on and on….

    I know these things seem irrelevant, but believe it or not—they actually do have an impact on politics and economics of the day.

    The moving parts are all different. Just because a particular course of action worked back then, it does not mean it will work now. And vice-versa.

    The historical economists are trying to extrapolate way too much information from a single similarity.

    As a result, the historical comparisons yield no useful information.

    History is instructive in teaching us about who we are…not what economic policy decisions we should make.

  27. juan


    I very much agree with the distinction between a technical or accounting based recovery and an actual recovery of the real, nonfinancial, economy.

    The latter might be:
    1. a rising rate of nonfinancial profit [ideally calculated as total profit relative to total capital rather than as percent or share of GDP].
    1a. that such rise incorporate but not be driven by the expectation of durability.
    1b. that this rate be, and be expected to remain, higher than that of the financial sector.

    Associated with/driven by the just mentioned –

    – rising investment in production of means of production and, related to this, transportation.
    – definitive turn from rising un and underemployment as well as the transcyclic decline of real wages.
    – etc.

    In still shorter form, the death of rentier capitalism, the money from money economy that through, among other things, its restructuring of effective demand [and greater inequalities] stands against society's reproduction of itself other than on a declining basis.

    From a long waves in rate of profit perspective, the present crisis is 'merely' the most severe marker along a nearly forty year path that's seen the rise [and possible demise] of 'permanent crisis management'.

    Too 'doom and gloom' or a rising potential to make history?

  28. cpic

    Richard and Leo

    You really think the Fed may not have the greater good of the broader economy at the top of it's priorities?

    … But rather that of the Bigger Financial Center leverage and power…..would you venture to say the treasury secretary for the last few terms think the same way …

    that's just not politically acceptable to Question and be taken seriously ….but maybe it should be

    oh wait that would be unpleasant re-direct me to the fed's talking points ……otherwise i would possibly conclude the economy (after 30 some years of finanicial sector growing influence and big industry pulling more politician and regulator strings) that this corrupt poltical snowball rolling down hill….seems destined to end badly …..and comparisons with the last several decades are futile

    who would guess that the simple cumulative effect of those with big industry interests posing as public sector guards could eventually bring the standard of living down more than most imagine in our "worst case scenario's"

    instead most collapse scenario's seem increasingly associated w/ some evil conspiracy as cause for collapse.. which is much easier for most to disregard and then with it …..the chance we will collapse (not to mention psychologically speaking we want to disregard this unpleasent idea)….kind of like ….even respectable people who mention such scenario's are labeled some "dismissive catch phrase" like doom and gloomer….

  29. Edwardo

    There is an air of comical unreality about this discussion that, unfortunately, emanates from the original post. I mean no disrespect to the author, but I will be frank in saying that I don't care for the argument. Nor do I care for the invocation of the arch Keynesian, Paul Krugman, who lately utters statements both for and against the presence of "green shoots." I assume the purpose of this tactic is to insure that he can always tell us that he told us so. Unfortunately, as a card carrying Keynesian, Mr. Krugman can not, or will not, reckon with the fact that since 2003 the marginal productive capacity of debt is at zero as that leaves his approach to the problem in the junk pile.

    Andrew Mellon was reviled in his day for his advice to, and here I paraphrase, liquidate, shares, farms, real estate and labor, etc. etc. It was indeed a rather heartless and not altogether defensible nostrum mostly because, at the time, deficit spending by the government, which was not itself in hock beyond all reckoning, was at least a plausible response to economic collapse. It didn't really work so much as it held the line to some degree. Now, however, that our government is massively indebted, as well as the private sector, more deficit spending is a recipe for even more enhanced catastrophe.

    There will be no recovery worthy of the name-please let's not engage in terms like technical recovery-until the debt is allowed to clear the system. To engage in end runs around the present and intractable mathematical realities is to simply guarantee the manifestation of ever more grotesque and painful distortions.

    Frankly, at this point, I doubt even allowing the debt to clear will allow Humpty Dumpty better than 2 to 1 odds of being put back together again, But at least we should acknowlege that allowing the debt to clear the system is a necessary but not necessarily sufficient condition for establishing a firm economic foundation going forward.

  30. Ryan

    So you tell us we shouldn't make the mistake of 1937 and 1997 by balancing our budget, but also that the U.S. cannot credibly maintain our current deficit, while then saying that the U.S. should "temporarily" (temporary so far has been 18 months) fill the gap until there's a sustainable point of recovery? You're having your cake and eating it too. Define what sustainable is for example.

    And don't mention Krugman. I had a post of mine removed from his blog once because I rightly pointed out one day he hadn't offered a solution to anything, he was only saying why everyone else was wrong. I think it was when he was saying that the Obama stimulus was not enough money and it would fail and he drew back on Keynesian theory. I asked "fine then, how much do you want? And if the amount you want fails, does this disprove your personal economic theory?" It's easy for a person to throw stones at others when he himself doesn't stand for anything or is willing to put his neck on the line to risk being wrong.

  31. DownSouth

    Dan Duncan said: "Just because a particular course of action worked back then, it does not mean it will work now. And vice-versa."

    Do you really believe the leading lights of the Austrian school would have agreed with that statement? If we take a look at the history of the thought of Dicey, Mises, Hayek, and Simons, it is very much based upon England's experiences.

    In Capitalism and Freedom Milton Friedman wrote:

    In the early nineteenth century, Bentham and the Philosophical Radicals were inclined to regard political freedom as a means to economic freedom. They believed that the masses were being hampered by the restrictions that were being imposed upon them, and that if political reforms gave the bulk of the people the vote, they would do what was good for them, which was to vote for laissez faire… The triumph of Benthamite liberalism in nineteenth-century England was followed by a reaction toward increasing intervention by government in economic affairs. This tendency to collectivism was greatly accelerated, both in England and elsewhere, by the two World Wars. Welfare rather than freedom became the dominant note in democratic countries. Recognizing the implicit threat to individualism, the intellectual descendants of the Philosophical Radicals–Dicey, Mises, Hayek, and Simons, to mention only a few–feared that a continued movement toward centralized control of economic activity would prove "The Road to Serfdom," as Hayek entitled his penetrating analysis of the process.

    Friedberg fleshes out what Friedman was talking about. Civil expenditure (includes civil and social services, postal services, and spending on revenue collection) in Britain was extremely low, about 30 million pounds, for many years. Then in 1890 it began to increase, reaching 52.9 million pounds by 1907. But it still remained a tiny sliver of national income, as the conservatives remained in power and kept a lid on spending. As Friedberg writes:

    The existing tax system was no longer capable of funding steadily expanding peacetime expenditures. Those few, like Joseph Chamberlain, who continued to defend further increases in spending were now decisively outnumbered. In the wake of the (Boer) war a new consensus had emerged in favor of the proposition that the limits of Britain's financial resources had been reached and that the government could therefore no longer continue to do business as ususal.

    In theory, at least, a recognition that change was necessary could have had two kinds of consequences. On the one hand the Conservatives could conceivably have undertaken a major effort at tax reform, breaking out of the confines of the old system in order to sustain continued increases in expenditure. This is exactly what the Liberal party would do only a few years later (in 1913) when it imposed a new "super tax" on incomes and used the revenues to pay for expanded social programs and eventually, a larger navy. Such a course was unacceptable to the Conservatives, both because it violated othodox principles and because it ran counter to their immediate political interests.

    So let me repeat. Nineteenth century Britain was an Austrian/libertarian wet dream. What Friedman fails to mention in his narative, and this is why Friedman is one of the greatest public liars of the 20th century, is that beginning in the 1860s, and for 50 years thereafter, Britain was in a prolonged, inexorable economic decline. This was a time when Austrian/libertarian thought ruled supreme, and yet it, nor the policies it inspired, saved Britain from decline.

  32. Anonymous Jones

    Ryan's comment reminded me of my favorite Bertrand Russell quote, "The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." While it may be easier to cast stones without offering solutions, this does not mean that such casting of stones is an entire worthless exercise. I do not have many definitive answers, especially about such overwhelmingly complex questions (involving billions of mostly independent variables) as the current US and global economies, but I do know when others' proposed solutions lack logic, rely on nothing but the counterfactual, or cite facts incorrectly. Pointing out the flaws in these situations is not just worthwhile but absolutely necessary in the iterative process that leads to new knowledge. My advice…stay humble. I don't have all the answers and I very much doubt anyone else does either.

    @ DownSouth — I love your comments as always, though even mentioning the words Austrian and libertarian is a losing proposition in my experience. I'm surprised the thread hasn't devolved already. I meet few who even grasp the main (and often great) insights in The Road to Serfdom. Most of the fringe supporters are driven by what seems to be an innate (and perhaps pathological) hatred of collective action of any kind (which creates, of course, an internal inconsistency with the principle of freedom of association). I doubt it can be cured through facts or logic. So in this case, as sad as this is given how much some of the Austrians brought to the table, it may be a more useful tactic to ignore it than give it serious attention by casting stones.

  33. Ryan

    Pointing out the flaws in these situations is not just worthwhile but absolutely necessary in the iterative process that leads to new knowledge. My advice…stay humble. I don't have all the answers and I very much doubt anyone else does either.

    We live in a political world. I expect people, especially in this climate where everyone is seeking to disavow themselves of blame and blame it on everyone else's failures, to do everything in their power to make sure that everyone receives maximum blame while keeping themselves blameless by not taking a side. I expect better out of a Nobel Prize Winner of Economics.

  34. marin belge™

    that beginning in the 1860s, and for 50 years thereafter, Britain was in a prolonged, inexorable economic decline.

    I look forward to dig into the brilliant achievements of the current courageous Keynesian-and-monetary handling of the current crisis by the US and GB. Trying to lock up Austrian thinking into the libertarian XIXth century corner is a tactic. You might as well re-read Rueff or Roepke, and check their achievements as monetary authorities.

    You certainly do not indebt yourself out of a debt-crisis. But you can possibly inflate your way out of it. Try at least!

    And call Volcker later

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