Twenty-Five Years to Work Off the Debt Overhang?

T. S. Eliot was right. Human beings cannot stand very much reality.

As much as I have an appetite for bearish views (I figure the optimist case gets disproportionate air time), the headline of Ambrose Evans-Pritchard’s latest piece, “Our quarter-century penance is just starting,” is grim even by the standards of the bearish faithful.

Evans-Pritchard, as usual, marshals some persuasive information:

“The current financial crisis is unlike any others,” says the Bank for International Settlements. Lasting damage has been done. The “cumulative output loss” is likely to reach 20pc of GDP in the major economies.

The message is the same at the International Monetary Fund. “The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,” said Olivier Blanchard, the Fund’s chief economist.

Mr Blanchard said an IMF study of post-War banking crises led to an unpleasant finding. “Output does not go back to its old trend path, but remains permanently below it.”….

All that has happened over this crisis is that huge private losses have been dumped on society: but the losses are still there, smothering the economy…”As long as economic growth relies on the state, you cannot talk about durable recovery,” said European Central Bank member, Yves Mersch…

We know what caused this crisis. The West kept short-term interest rates too low for a quarter century, luring society into debt: and the East held down long-term rates by flooding bond markets as a side-effect of their mercantilist strategy (ie suppressing currencies to gain export share).

The outcome was over-investment, excess capacity, and too much debt among those supposed to buy the goods. Has any of this changed? No. Have we cleared the excess plant? No.

Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. “Generational destruction of a society’s balance sheet down not rectify itself in a matter of months”.

Evans-Pritchard takes issue with Paul Krugman’s call for more fiscal stimulus. Evans-Pritchard instead recommends quantitative easing, not as a solution per se but to prevent deflation from taking hold.

I’m not keen about either approach, at least in isolation, The idea of pushing more money through the same unreconstituted systems is likely either not to work or if it is done on a sufficient scale, to produce a reversion to the behaviors that led to the crisis, with the similar, or even worse results (since the underlying debt will be even larger).

I am struck by the insistence of looking at complex phenomena like the Great Depression and Japan’s lost two decades and believing that a single remedy can pull us out of this mess (to his credit, Evans-Pritchard does have low expectations for his suggestion). There is too much willingness among some economists to attribute the substantial improvement by 1936 solely to fiscal stimulus. The early years of the Depression also saw substantial debt defaults and writeoffs (even if they are now deemed to have been a policy error, to analyze the Depression without considering their elimination on the trajectory of the upturn is incomplete).

Similarly, the Great Depression also featured substantial banking and securities reforms, other mechanisms to encourage debt restructuring (the HOLC). We have almost the reverse situation now, with no ready way to restructure or renegotiate mortgages owned by securitization vehicle. Thus while a fair number of debts were resolved in the Great Depression, albeit many brutally and at unduly high cost, we have almost the polar opposite, at least as far as mortgages are concerned, with loans that should be renegotiated instead kept in force, banks refusing to foreclose on houses, to avoid recognizing the loss and even in cases to keep the owner as the party liable for property taxes.

The Japanese have warned us that restructuring the financial system and cleaning up bad debts needed to be the top priority. But US economists decided we understood the Japanese malaise better than they did and refused to heed their advice. Right now, the mood among many in the profession seems self-congratulatory, that they successfully steered the economy off the shoals (of course forgetting that that the economy that foundered in the first place had been redesigned in line with orthodox beliefs).

We’ll see in a few months how viable the “green shoots” prove to be.

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  1. fresno dan

    How many times have I said that US=Japan? O yeah, about 1,238,839 times.
    There just seems to be a philosophy of protect the debt, or more acucrately the concept of debt at all costs. Incomes and net worth are going down – a few years ago I was pretty confident about my retirement. Being a gubermnt weenie I still feel pretty secure about my actual pension, but the hit I have taken on my house simply means I do not have 100K to spend that I had prior to the GFC.

  2. Swedish Lex


    “All that has happened over this crisis is that huge private losses have been dumped on society: but the losses are still there, smothering the economy…”As long as economic growth relies on the state, you cannot talk about durable recovery,” said European Central Bank member, Yves Mersch…

    We can see from the news that Europen leaders ahead of G 20 are beginning to make stronger statements on the too big to fail issue. The Germans are coming out strongly in support of new rules that would make it impossible for banks to “blackmail” governments. The quote from the ECB banker above echoes this too and that the debt/leverage situation politically is being perceived as preventing a real recovery from taking place.

    The EU States can not go it alone on this one and any new rules will have to be European, not national. There is currently a power vacuum in Brussels as a new EC Commission will be appointed in the coming weeks and months. It will be crucial to see who gets nominated for the position as Commissioner in charge of banking and financial services. That person will have a key role in drafting the proposals for new legislation during the coming 5-year period. Both Germany and France are believed to wanting to get that position. With a French or German Commissioner for banking and financial services, we should assume that bold new proposals will be forthcoming and that they will not be to the Industry’s liking.

    The next question is then how the U.S. would respond to such a development in Europe. The new European regulations might be a lot more than U.S. banks would be prepared to accept (although they would have to apply them for the European operations, obviously). Another interesting lobbying war seems to be looming.

  3. jest


    What I am struck by most by policy makers & economic establishment is their denial of the notion that the crisis did not cause our plight, but exposed our weaknesses & accelerated a decline that was inevitable.

    I hate to take this view, but the US has not acted all that differently in the world economic stage than Bear or Lehman. Over-leveraged, belligerent, liberal use of off-balance sheet accounting (i.e. unfunded liabilities), a major beneficiary of income inequality, and extracting wealth from the rest of the globe like a “giant vampire squid.”

    But due to entrenched academics, erroneously awarded Nobel Prizes, outdated economic ideology & jingoism that basically were propaganda for supporting the Cold War (I’m looking at you, Mr. Kudlow. It’s over.), and a perpetually perplexed public, I doubt this view will ever even be thought about. Especially since the “Investment-Bankinization” of the US was their wonderful idea.

    But from that perspective, i.e. America-at-large being the same as Merrill Lynch, 25 years doesn’t seem *that* much of a reach. Hopefully, China’s Ken Lewis will buy us out at a premium. Maybe we’ll get a free toaster out of it.

  4. reason

    I wonder whether we can Steve Waldmann to comment on this. I think he must somewhat disagree with this analysis.
    I know for instance, I disagree with this:
    “The outcome was over-investment, excess capacity, and too much debt among those supposed to buy the goods. Has any of this changed? No. Have we cleared the excess plant? No.”

    Uh, uh – I don’t think excess capacity in a macro (as against in a micro) sense is a valid concept and I know a post from Steve on Interfluidity said exactly that. If you can have macro ovecapacity, then how can you have growth? There is a big difference between people not being able to pay for things, and things being useless or unwanted. Lets not confuse real problems and financial problems, the world is complicated enough.

    You are getting nearer by mentioning the necessity of wiping out and restructuring debt – at least there you acknowledge the financial rather than real nature of the problem. But I don’t think it is politically possible to tell people that people who ran up large debts consuming what they couldn’t afford should get off scott free, and people who thought they were saving for retirement they should have those savings wiped out. The distributional consequences are too unjust. Therefore I think deliberately creating negative real interest rates and inflation by fiat money creation is the least painful way forward.

    And the “excess capacity” can be quickly removed if the masses in China and India stopped massively saving (i.e. running trade surpluses) and started consuming. For me I think the solution here is as simple as forcing an international financial regime that discouraged large international financial flows, penalising not just deficit countries but also surplus countries. We won’t get out of this without international financial reform. Part of it, should be creating an international currency that is not a national currency. The distortion of the US economy that resulted from it having the reserve currency carries a lot of the blame for what has happened.

  5. David Habakkuk

    Back in his ‘Quiet Coup’ article in The Atlantic Monthly in May, Simon Johnson remarked that if the IMF’s staff ‘could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.’


    A central difficulty is that the power of this oligarchy, in the U.S. — as in my own country, Britain — has been sustained by a very wide acceptance of central parts of its view of the world. This acceptance has been radically called into question by the financial crisis. But an upsurge of hostility to Wall Street and the City is one thing — the mobilisation of public support in favour of measures which are anathema to the oligarchy, and construction of the kind of coalitions which could put these through, quite another.

  6. Don


    What I read into your doubts about the monetary or fiscal ‘solutions’ to our current economic travails is that there are no realistic solutions. The unwillingness to face that fact by politicians, together with their attempts to create a painless solution [low rates and more debt to solve the problems created by low rates and excessive debt],means that it may not be 25 years, but it will likely take at least 5-10 years for us to recover.

  7. Dave Raithel

    This and the Lee Adler piece recalled to mind a point made by one of the Tyler Durdens a good while back – consumers owe banks/business as much as banks/business owe the Fed. The point was made sometime back when Buiter and Evans-Pritchard (I believe as well) were talking “Jubilee”. To reiterate my inference then from one of the Tyler Durdens observation: Well, let’s just cancel off all sides of the ledgers and start over …

  8. Siggy

    The cause: Profligate spending supported by unserviceable debt.

    The Cure: Extinguish that debt which is unserviceable.

    Extinguishment can be accomplished by either payoff, or, by repudiation. Note that the conversation of debt to equity is a form of repudiation.

    Payoff requires substantial profits, hard to come by just now and it will take time. The required time is a function of the magnitude of unserviceable debt that is still outstanding. A time frame of from 10 to 20 years is not unreasonable. The good thing is that the coming generations are relative smaller than the ‘baby boomers’. That fact has a negative in that the relative smaller coming genrations will be required to support the entitlements of the ‘baby boomers’.

    Repudiation is a viable choice, but it bears significant social consequences. The social consequences relate to a prbable long term high level of unemployment and/or under-employment. Incomes stagnate and the ability to generate profits that would support savings, a recovery and economic growth would be slow to come.

    Conclusion: There is no quick fix!

  9. constantnormal

    I think that 25 years sounds low. The Japanese have been at it for about 20 years, and they are only about halfway to getting their debt overhang back to nominal levels. And I believe that we are starting with a total debt overhang (govt+corporate+personal) at a greater multiple of the GDP than the Japanese did.

    But perhaps the debt reduction accelerates the closer it gets to rationality, as the economy can begin to breath again. Still, I don’t see Japan getting its debt-to-GDP back to nominal levels within the next 5 years …

    If we don’t get serious about zeroing out the toxic debt and cutting government deficits, we will be struggling with this for 40-50 years. (that’s “we” in the national sense — everyone reading this will likely be dead before the debt overhang is gone)

  10. Hugh

    I have never understood the concept of quantitative easing in the environment of a fraud-ridden and broken financial system. I have no idea how long it will take to get past the current mess. I see lots of procrastination, misdirection, and avoidance. I don’t see any real attempt to confront the problems the economy and the financial system have. We are 2 years into this. Great resources have been wasted. How can any of us project how long a solution will take if there is no solution on the table?

    I do think that any solution will involve massive debt writedowns and a complete restructuring of the financial system. When we look at government’s role, I think we need to recognize that financial stimulus is only aspect. Government will need to do better in providing a social safety net. This means extending unemployment benefits, providing healthcare (not the current sham “reform”), and probably bailing out pensions. It also means supporting state budgets which look like they will hit the wall in 2010 without much larger federal assistance. It means that, as mentioned above, government will have to become a real reformer and regulator of financial markets. And finally it means financial stimulus directed toward re-industrializing the country in a sustainable way.

  11. DownSouth

    David Habakkuk says: “But an upsurge of hostility to Wall Street and the City is one thing — the mobilisation of public support in favour of measures which are anathema to the oligarchy, and construction of the kind of coalitions which could put these through, quite another.”

    Superb analysis. Before we can fix the economy, the polity must be repaired first.

    The American left has completely eviscerated itself. It’s institutions–labor unions and a political party built from the grass roots up–have been dismantled in favor of a very different style of politics: a combination of elite-network and protest. In the place of union and ward organizers we have elites–moralists, sociologists, educators, economists, etc.–who, as Reinhold Niebur pointed out, “completely disregard the political neccesities in the stuggle for justice in human society by failing to recognize those elements in man’s collective behavior which belong to the order of nature and can never be brought completely under the dominion of reason or conscience. They do not reocognize that when collective power, whether in the form of imperialism or class domination, exploits weakness, it can never be dislodged unless power is raised against it.” Instead, as Niebuhr continues, they “imagine that the egoism of individuals is being progressively checked by the development of rationality or the growth of a religiously inspired goodwill and that nothing but the continuance of this process is necessary to establish social harmony between all the human societies and collectives.”

    By far the best case study of elite-network and protest politics I’ve run across is that done by Peter Skerry in “Mexican Americans: The Ambivalent Minority.” In the book he disusses four styles of politics: Friends-and-Neighbors, organization, protest and elite-network. Tragically, he concludes, “the dominant thrust of Mexican-American politics will be that of the elite-network.” “As I have explained,” he continues, “this style of politics is dependent upon displays of angry protest… In essence, this approach is profoundly antipolitical. It teaches those without political power that it can and should be bestowed on them by elite benefactors, whether Anglo or Latino… In the name of politics, we now have a new source of discord–of antipolitics.”

    I think we can generalize what has happened in Mexican-American poltics to the overall American polity.

    I read articles like the one in today’s links by Robert Reich, “The Guns of August, and Why the Republican Right Was So Adept at Using Them on Health Care,” or the one by James K. Galbraith, “Financial and Monetary Issues as the Crisis Unfolds” (see Links 8/26/09), and I am completely dismayed. Reich and Galbraith see clearly what the problems are, but they are clueless as to how to bring about policy reform. If they weren’t so hobbled by their Enlightenment ideologies, they could learn a lot in short order from two of the 20th century’s greatest preachers, men who weren’t deluded into believing that social injustice can be resolved by moral and rational suasison alone:

    •”History is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily… We know through painful experience that freedom is never voluntarily given by the oppressor; it must be demanded by the oppressed.”–Martin Luther King, Jr.

    •”[I]t is impossible to count on enough moral goodwill among those who possess irresponsible power to sacrifice it for the good of the whole, it must be destroyed by coercive methods…”–Reinhold Niebuhr

  12. Dave of Maryland

    When we come to very long time frames – a quarter century – it’s important to consider more than one or two variables. One thing always leads to another, and then another, and another.

    Consider a Berlin shopkeeper, fall of 1916. Nice little shop on some sleepy side street, a mom & pop business. The war has been going for two years. Only two years into the war and already the economy is wrecked, already a lot of local sons have been killed. The shopkeeper still remembers the “good times” of only two years before. If only the war would end, he thinks, those good times will return. But what actually happened?

    The war went on for another two years. Seems like every one of the local boys were killed. And then a crushing defeat, followed by a revolution and the loss of the Kaiser, the only leader anyone had ever known. Some strange new government, saddled with reparations. How long can that go on?

    Long enough to generate hyperinflation & sink the economy even further. Fringe groups make big promises. Suddenly there’s a world-wide economic collapse & a few years later one of those fringe groups grabs power. It’s now been nearly 20 years since the troubles started.

    And for a few years there’s excitement & hope, but almost as soon as there is, another war starts. Our Berlin shopkeeper asks, why? Why? WHY? Though at first it seems as if the world will leave us with our easy victories, the Russians don’t want to play nice & suddenly it looks serious. The war ultimately ends with the city itself firebombed & occupied by foreigners.

    So now it’s been 30 years since the initial question, “when will the good times return?” The city is a bombed out, starving hulk. In the winter people freeze. Slowly, slowly, slowly they dig out. Slowly they rebuild. And by the mid 1960’s, the good times have returned.

    But not in our shopkeeper’s lifetime. Not, very likely, in his children’s lifetime. The shopkeeper’s grandchildren, who had never known good times, finally see a return to prosperity. Half a century.

    Well, the grandchildren were lucky but only if our shopkeeper had his store on the “fortunate” west side of town. If he was on the east side, the good times did not return until around the year 2000.

    With hindsight we know what will happen to our shopkeeper. In hindsight we know how one dang thing led to another. But to our shopkeeper in 1916 it was unimaginable that an August folly would result in the city itself being destroyed, stripped of its power, divided in two and made superpower plaything.

    To make this personal, in 1914 my grandmother was a girl of 15. Her father would have been my fictional shopkeeper. I do not know whatever happened to him. Granny’s mother lived to be 101. She finally died in 1971. I am now 57. I met great-grandma only once. I confess I never knew her name.

    Very long term processes are not like five year car payments. Nor are they as benign as a 30 year mortgage (few of which ever run to term). Long term processes are like out of control tarballs that seek out other, unrelated tarballs. Like cancers, they metastasize in ways that cannot be predicted, much less controlled. I first had this nightmare shortly after the start of the Iraq war, when I asked myself, “when will the ‘good times’ of 1999 return?” So far, a stupid war has led to a stupid economic collapse, with worse still to come. Yet still governments (our only hope!) stand about like deer in headlights. Am I scared? For the first time in my life, yes, I am.

  13. Toby Russell

    I agree with posters calling for financial reform, and want to add that the other elephant (alongside the broken system) in the room is technological unemployment. The Economist recently had an article on this:

    Re-engineering and automation have been feared for over a century and yet the world moves on, economies everywhere employing people in sufficient numbers to keep purchasing power high enough to prevent systemic collapse. Yet there is evidence in terms of underemployment, part-time and low-pay work, decreasing work-weeks, shriveling union power etc, that labour is less and less in demand. While the fear of the ravages of technological displacement of human labour might have been too shrill in earlier decades, and while the dear hopes of futurists and technophiles might have been too dear, perhaps only their timing was off. We poor humans — sweaty, thirsty, hungry and sleepy — are less and less able to compete with our machine and (now) software counterparts. The End of Work (Rifkin, 1994), though old, has important things to say on this topic.

    I believe we need a system reset and a new type of money. As I understand it, all money in a central bank fiat system is brought into existence as interest bearing debt. I cannot see how this is sustainable, even before considering the stress put on the environment by the system’s need for perpetual growth. The medium of exchange we have designed to enable economic activity is far too “centre stage” to be healthy. Money has become top dog, a symbol for success, for wealth, even for happiness. It pushes to distant second all other concerns, like dignity and the environment.

    Can’t we come up with something better? And in doing so, must we wait for the great they to come up with it for us? Linux is a well functioning community effort and shows what can be done with a strong base idea and a lot of hard — volunteer — work. I believe money needs a stripping down, a demotion, a dose of KISS. We need to recognise it as an abstraction of value, not a store, since if we see it as a store of value the implication is that it has value in and of itself. I don’t think it does. It is merely an enabler of economic activity.

    If a money-system could be designed that required little human-labour; that was automated; that did not need usury; whose supply could be dynamically adjusted via constant live assessments of the value of goods and services in the economy, where only one tax — a simple, unavoidable sales tax — were levied, which itself could be adjusted to control inflation/deflation; if this were doable via some software because the system had been simplified; maybe through such a system redesign money could be demoted to act as lowly enabler of trade, NOT a means to wealth in and of itself. Some sort of debt-free money, simple enough to administer with very low-overhead, perhaps even only electronic, might be the way to diminish money’s significance in the world. Thereafter, to cope with growing unemployment, we could seek to fully automate production of the essentials to provide them for free, enabling the economically redundant to live lives of dignity, while lessening their burden on the state. Instead of being afraid of automation, we ought to find a way of embracing it. We certainly can’t stop it.

    No doubt this sounds inexpert and ill-considered. It is. It is a young set of ideas (mostly borrowed) in my head, a head which is untrained in the world of economics. And yet I’m prepared to take the risk of exposing it here with the view of contributing to a debate I think needs to be held. We face an historical challenge whose origins are the financial system itself, compounded by rampant technological development and environmental damage. Dealing with these problems sensibly requires solutions that address all of them as simultaneously as possible. Patchwork won’t work.

  14. DownSouth

    With the government lavishing trillions of taxpayer dollars on big banks at near zero percent interest and them using the money to pay multi-million-dollar bonuses, as if nothing had ever happened, a story like this really sets your blood to boiling:

    “Banks turn away small business:
    With few bank loans to be had, small businesses now pay higher fees for alternate financing.”

    “If you were going to go out in the open market and borrow…a year ago, it would be anywhere from 12 to 16 percent. Now it’s 24 to 28 percent.”

    “And we started looking at the TARP and TALF money. I said, OK, let me go through the rigamorole of finding out how to do it. So I called the Treasury department and here’s how you do it. You download these forms. You fill out these forms. But to do these forms you have to go to a broker-dealer that is handling the TARP money. I mean the government doesn’t give the money directly to an institution that is looking for it, it goes through a Chase or a Wells Fargo or something like that. There’s a list of about 20 banks that are on the list of these broker-dealers… And I had gone out to them and said I’d like to speak to the broker-dealers…before I sit here and do all this work of filling out all this paperwork let’s get started on how to do it, what to fill out it, what’s the right way to go about this thing. I’m still waiting for my call back. And I’ve asked several times. Because the government doesn’t want any part of it, they say talk to the banks, and the banks don’t get back to you. So there’s no way to even start the process of getting the money.”

  15. Jim B

    Dave of Maryland makes a good point; The changes we are witnessing are not temporary – not even short to medium term. They are long term – almost epochal.

    We expect things to get better soon – we argue about whether ‘soon’ means a couple of months or a couple of years. But what if ‘soon’ means half a century. What if the required changes require multi-generational modifications to human perspectives?

    My grandparents lived through the depression. My grandfather hid behind packing cases at the end of the working day to avoid being caught – and laid off – by the supervisor. During the early fifties he still thought of a mortgage as a millstone around the neck of the working man.

    These attitudes stayed with them during his working life and carried on to his children – my parents. They only softened during my lifetime – through the late sixties and seventies. The new attitudes led to the excesses of the seventies and beyond – forty or fifty years later.

    Any thoughts that these changes of attitude will respond to short term government policies – or simply revert to recent historical norms on their own – are surely wildly mistaken.

    We could well be facing the consequences of a half century long binge of debt in several decades time.

    Don’t hold your breath

  16. FrancoisT

    constantnormal wrote:

    “If we don’t get serious about zeroing out the toxic debt and cutting government deficits, we will be struggling with this for 40-50 years.”

    And then, The Gods invented War, as a mean to sear into the mind of those feeble human beings, the price of their frailties, the inanity of their egos, the burden of being slave to their passions.

    We may not get another “World War”. But I’ll bet you my last zloty that regional conflicts will increase in a geometric way during the next decade or two. History shows that is how deep crises are usually resolved, especially when the path to peaceful resolution is blocked by the existing oligarchies. An overthrow of the existing order tends to take place.

    As far as the US of A is concerned, well…said overthrow can be peaceful…or not.

    I say it won’t be peaceful. Not a second Civil War, mind you, but there will be quite a few pints of this “very special juice” on the streets before this is over. Politicians are so dependent on the oligarchies to maintain their power that the only option open to the people will be to crush the politicians of both persuasions at the ballot box, something mightily difficult to do in a rigged two parties system like we have. Since the political apparatus have managed to make the emergence of a third party next to impossible that leaves us with the “not-so-peaceful” option.

    Color me pessimist, but if we can’t even get obvious financial reforms, nor a health care one, when, in both cases, the necessities are so glaringly obvious to anyone not totally impervious to the facts on the ground (as opposed to the “facts” on teevee) there is barely any hope left of a civilized resolution of the primary causes of this crisis.

    In any scenario I can think of, it ain’t going to be pretty.

  17. Anonymous Jones

    DownSouth — Great quotes from MLK and Neibuhr. It is always heartening to hear experienced men confirm my instincts. There is something in the human condition that leads many to believe in ideals, to believe in the “morality” of no compromise, to strive for the paradigm, when it is clear not just from the evidence all around them but in fact all of history that these things are unattainable. There appears to be very little evidence that striving for the unattainable leaves one better off than striving for some attainable compromise in the first place.

    When I was young, back in the 70s, I had ideals too. A communication and information revolution was happening all around me (culminating let’s say with CNN in 1980), and I dreamed of a world that would no longer be ignorant of the horror of wars, the disgusting idiocy of racism, the many injustices of wealth distribution. The dissemination of information was going to lead to a revolution of reason!

    Instead, we ended up with the elite turning the networks and the papers into profitable channels of propaganda. Of course, the elite didn’t do it alone. No one forces anyone to turn on Fox News or visit some far leftist blog. Human brains have incredible defense mechanisms; they are virtually resistant to any new information that might jeopardize their world view. Of course, they are not completely resistant, which is probably why humans spend so much time listening to Limbaugh or some equivalent hack on the left who continues to help them massage new information in a way that digestion will not threaten their twisted world view for yet one more day.

    I still talk to people every day who believe the vector of human society is toward more tolerance, toward more reason. I hope they are right, but I fear they are not (especially because human history does not necessarily support this idea). One thing I am pretty confident in, however, is that we won’t move in that direction because of idealists without pragmatism, whether they are of socialist, libertarian or any some other persuasion.

  18. Skippy

    Well I’m just wondering when Latin and Togas become the latest trend in DC and on Wall st.

    I have this recurring dream where I ‘m back in my childhood watching star trek, Kirk and the gang have transported down to a planet were history took a different turn, the fascists won. On this world government buildings are grandiose and attest to their origins (see DC), business and government are one in the same (see Wall St. the Fed and Treasury, revolving door), War is the order of the day as the system must expand or die, the Gods are invoked in every utterance and security can be seen every where. Those that speak ill of this world are reported on and have long history’s save the day they must be diminished or carted off to some inhospitable place for not seeing the light. Those with the will to do what ever it takes to concentrate wealth are rewarded and popularized for all to see, where as the chaff of this process are bundled and shipped for labor to where ever the need is greatest (see mobile workforce) to spend eternity in reduction.

    Skippy….Then I wake up and find it is not a dream, but reality and my tired subconscious is in a futile an infantile way coping.

    PS. DownSouth can you help me with an example where the softer more gentile people actually rise up and do not repeat the mistakes of their oppressors, save the people of the trees. Maybe the last retreat is as a Noble Savage, some where downsouth of you.

  19. cougar_w

    War on a massive scale is history’s way of erasing debt.

    War accomplishes this by erasing a subset of debtors and creditors alike. You’ll get your Jubilee year — in blood.


  20. anon

    “I figure the optimist case gets disproportionate air time”

    Well, you certainly make up for that all on your own.

    (In case you think that’s a compliment – its not)

  21. john bougearel

    CNBC’s Steve Liesman interviewed Dr. Feldstein at the American Economic Association (AEA) annual meeting in San Francisco on Friday Jan 2, 2009. In the interview at 2:47 Liesman comments that some folks claim that “it [fiscal stimulus] really hasn’t worked in the past. There are people who go back to the 1930’s and say FDR spent for a full decade and it was only World War II that got us out of it.”

    Dr. Feldstein’s reply is priceless: “He [FDR] didn’t really spend very much. He did a variety of things, regulating wages, regulating prices. He did small spending programs but I don’t think it ever got to be more than an extra roughly 1% of GDP, in today’s terms that would be under $200 billion.”

  22. john bougearel

    Christina Romer, exerpted From the

    The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow. In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer/

  23. Juan


    Chronic excess capacity may not make sense within the neoclassical conceptual framework but this does not prevent its existence in the real world where consumption and production do not attain the assumed equilibriums but, instead, there can be evident, tending to generalize, over-expansion of the means of production if not also production itself.

    Within capitalism, one of the causes of crises has historically been an over-accumulation of capital; attempts to mitigate via demand side policies and other credit expansions tend to save facilities which would otherwise be wiped out during normal recessions. The ‘underbrush’ builds up over a number of cycles, helps pull avg. rate of profit down, reduces longer run growth rates, creates conditions for its own demise. Nor, with the globalization of production and distribution, is this simply national.

    There are always limits.

  24. psychohistorian

    Another passionate posting for which many of us thirsting for evolution are thankful. It is good to read in the comments that the rabble are rousing.

  25. reason

    you are mistaking economic production for industrial production.
    I actually agree with you about the “limits to growth”, but that is just a question of the correct structure of economies. I repeat, overcapacity in a macro-sense is nonsense – what they really mean is structural imbalance.

  26. DownSouth

    Skippy said: “DownSouth can you help me with an example where the softer more gentile people actually rise up and do not repeat the mistakes of their oppressors…?”

    My edition of Annah Arendt’s “On Revolution” has an introduction by Jonathan Schell, and in it he lists a number of revolutions that might meet your requirements, what he calls “the wave of democratic revolutions”:

    “Its beginning should perhaps be dated from 1956 (Hungarian Revolution) rather than, as is usually done, the mid-1970s, when the series seemed to begin in southern Europe with the overthrow of the Greek junta in 1974, of the autocracy in Portugal that same year, and the transition to democracy in Spain in 1975. The long parade of revolutions that followed included, among others, the Solidarity movement in Poland in the 1980s, the ouster of the Argentenian junta in 1982, the fall of the military dictatoriship in neighboring Brazil in 1985, the expulsion of the dictator Fernando Marcos in the Phillipines in 1986, in the revolution by “people power,” the fall of the autocrat Chun Duo Hwan in South Korea, the collapse of the Soviet Union and its empire in the late 1980s and early ’90s, the replacement of the apartheid regime of South Africa with majority rule in the early nineties, the fall of Slobodan Milosevicz in 2003, the “Rose Revolution” in Georgia in 2003, and the “Orange Revolution” in Ukraine in 2005.”

    Schell adds that the “great majority of these movements and revolutions exhibited a remarkable number of Arendentian characteristics. Most were aimed at establishing conditions of freedom rather than solving social quesitons. (In consequence these social questions were unfortunately left on the table in the new world of market globalization, which, having proved unable or unwilling to deal with them, now face a powerful backlash, in South America and elsewhere.)”

    Glad to see you back. I haven’t seen any comments from you in quite a while so was wondering what happened to you.

  27. Skippy

    DownSouth said…..(In consequence these social questions were unfortunately left on the table in the new world of market globalization, which, having proved unable or unwilling to deal with them, now face a powerful backlash, in South America and elsewhere.)”

    Yep as I feared, it is no longer a local problem, but global one, hence the need for global solutions. Good luck with that conundrum with sovereignty, territory’s, cultural identity’s etc coming into play. Man humanity really needs to plateau (take a breather) for a bit before charging off some blind cliff in its haste to achieve the next level.

    Skippy….baby bonuses here in Australia just to boost population for future tax revenues, sheez. Ohh and BTW look out the boys are coming home, lack of work in the states, hows a few million unemployed going to affect Mexico upon return.

    PS. thanks for your reply!

  28. Juan

    reason, a bit of ‘deconstructing’ re. your response:

    you are mistaking economic production for industrial production.

    First of all, industrial production is a particular type of economic production. It is not a case of either/or but of determining sets of social relations of production and REproduction such as generalization of commodity production, the constellation of legally-politically enforced private property and transformation of subsistence labor into wage labor, with and from which an historically distinct method of producing, appropriating and distributing labor created surplus rises.

    Secondly, I was not at all ‘confusing’ one type [pre-capitalist, pre-industrial capital] with what remains the dominant form of the capitalist mode of production, a form which somewhat more than two centuries ago had begun its subsuming of both loan and merchant capital and, through successive phases of ‘globalization’ has punched, shot, bought its way over the face of the entire planet, while at same time appropriating from [and recreating] areas of pre-capitalist social relations. This latter stands as an ongoing ‘primitive accumulation’ [evidenced in the modern sense as the globally expansive informal sector ranging from ‘petty commodity producers’ to slaves].

    I actually agree with you about the “limits to growth”, but that is just a question of the correct structure of economies.

    If ‘Limits to growth’ is understood only in terms of resource limitations there is once again the failure to grasp interaction of nature on one side and dominant social relations on the other. Which then allows many to pretend that an economic system driven not by production for needs but profit, accumulation and market expansion is unproblematic or might be perpetuated ad infinitum ‘if only’ it could be correctly structured rather than be what it has been/is.

    ‘Correctly structured’ relates to _lets pretend assumptions_ of equilibrium, rational agents and static models, not to the real world of capitalism but, rather, a type of idealism required to displace inherent systemic [endogenous] contradictions to ‘the outside’, to cast systemic failings in terms of ‘shocks’ of all kinds but quite often as simplistic anti-govt/pro-‘free market’ ideologies.
    We should have progressed at least to the recognition that neither extreme is viable while the intermediates of mixed economy have become very much less so but has and has always had limits.

    I repeat, overcapacity in a macro-sense is nonsense – what they really mean is structural imbalance.

    ‘Macro/micro’ is itself a nonsense rising from the development and mainstreaming of a utilitarian, marginalist economics that shifted emphasis from production to consumption but not merely consumption-in-general but to individual consumption. There are specific reasons why this shifting originated but, since most never bother with social and economic history, these remain essentially hidden from nearly a century of neoclassical ‘schools’ and their ever more enhanced subjectivisms.

    ‘Structural imbalance’ is a misnomer for sectoral disproportionalities which, from a static perspective might be called ‘imbalance’ no matter that this latter _assumes_ the possibility, even necessity, of some inherent balance and lack of disproportion even though we’ve known for a very long time that sectoral profit [_not_ earnings] rates are variable, that this relates among other things to relative productivity on one hand and mass of capital on the other.

    In a dynamic sense, overproduction and over-accumulation of capital in one and another sector has real, objective, basis and somewhat contrary to the misunderstandings of J.B Say’s misunderstanding, is not avoided through the tautology of supply=demand. Overproduction of the means of production and overproduction of consumer goods are related but not identities other than within a consumption centered set of self-referential theories perfectly unable to capture, much less learn from, real system dynamics.

    No matter how blatantly on exhibit, the neoclassical bunch discards that which fails to agree, that which fails to transform the real into _its_ theories.

    Try a quick search for ‘Global excess capacity’ or do some research on the long run expansion of the MASS of not-utilized industrial capacity in the U.S. — and since I would prefer to avoid writing a few hundred page ‘comment’ — then work on why a mere increase in effective demand cannot prevent such build, and why overaccumulation and disproportionalities are inter-related rather than monocausal.

    Sorry to sound so pedantic but am relying on real world experience plus more decades of informal/formal research rather than what seems to have been an ideologically informed ‘off the cuff’ type of statement.

  29. Juan


    Thanks – I’ve been preoccupied with matters of [personal] health, i.e. making the round of specialists and tests in an effort to discover reasons[s] behind unintentional weight loss. What an ‘interesting’ health care system we have, but that’s another matter.

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