A look at out future, 2009 – 2010 … and beyond

Professor Nouriel Roubini is a “Dr. Doom” (source:  NY Times) for our time.  His forecasts are both analytically clear and terrifying, as in “I fear the worst is yet to come” (The Times, 26 October 2008).  As such he provides a clear reference point against which to compare other scenarios.  How does my view contrast with his?

The Professor sees this as a long, bad cycle.  We both agree that the global economy suffered the equivalent of a cardiac arrest in October, the second phase of the global recession (which started in late 2007).  Beyond that, however, the Professor is Dr. Pangloss compared with me (but not in any other sense).  Our views differ in two respects.

(A)  In 2006 and 2007 I believed he was too early.  The Battleship America (and even more so the world) turns very very slowly.  This was not a typical post-WWII recession, a rapid slowdown caused by accumulation of excess inventory by businesses, or the Fed fighting inflation by increasing interest rates.  This is something far larger, and hence was slower to develop.

(B)  Now he is IMO too optimistic.  This is not a cyclical economic event.  This is a historic cycle, the end of the post-WWII global geopolitical regime. 

The magnitude and length of this downturn will be greater than economists expect (this is of course an over-simplification).  Most suffer from “locked orientation.”  That is, they “know” that this is a typical post-WWII cycle, and so disregard any contrary observations.  This accounts for the slow and inadequate reactions of Secretary Paulson and Chairman Bernanke.  For all their knowledge and experience, flawed orientation creates flawed decisions and actions.

Guessing

This is just a guess, like all large-scale geopolitical forecasts (and unlike Dr. Roubini’s economic forecasts).  This downturn might initiate a long, slow process of change in the world economic and geopolitical orders, changes that occur during the downturn and subsequent expansion.  Or this global recession might precipitate rapid change. 

What lies ahead on the path is not knowable, as it depends on choices we have not yet made and cannot yet understand.

Choices we have not yet made and cannot yet understand

We have already seen how this works. 

(1)  Like President Hoover and Andrew Mellon, the Bush Administration has converted under pressure from free market policies to large-scale interventionism almost indistinguishable from socialism. 

(2)  Wall Street’s leaders advocated free market solutions until, facing bankruptcy, they beg for government money.

(3)  The auto companies protest government intervention in good times, and now beg for government aid (probably a long line will form behind them).

(4)  Many homeowners were independent yeomen forging their own destiny.  Now they cry for foreclosure moratoriums, bailouts, and prosecution of their creditors for “abusive lending.”

All this and the crisis is only 23 months old (arbitrarily starting with the collapse of mortgage brokers in December 2006)!  The full force of the recession has only begun to appear in September, and will increase through the next several months (at the very least).  How will America’s “core” beliefs change as the recession grinds us down in 2009 and 2010?

“Choice. The problem is choice.”
— Neo in The Matrix Reloaded

Forecasts

We cannot now forecast with any reliability because this is an event like none in our history.  There are precedents, but our modern economy is too unlike that of 1880 or even 1930 for those to illuminate our situation.

Events happen more rapidly than that most analysts can update their mental models, so their work is outdated when written.  We cannot see the end of this cycle; we can only track the process.

At a deeper level, beyond the flow of events, this is all about choice.  Every serious crisis forces us to decide what America means.  We weigh our fidelity to our principles, our history, our forefathers — vs. our ability to collectively withstand pain (financial, social, political).  These are collective decisions, because all large-scale economic events have a decisive political component. 

There is no advice to be given in any useful sense.  My recommendations to my fellow citizens are as follows:

  • Hang together.
  • Sort out in what we truly believe (obviously belief in “free market solutions” has not made the cut).
  • Stay cool.

Difficult times lie ahead.   We will make difficult choices among unpleasant alternatives.  I have faith that we will make wise choices.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp relevance to this topic:

Forecasts on the FM site about the crisis:

  1. We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  2. A warning from Professor Niall Ferguson, 4 January 2008
  3. Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  4. Is America’s decline inevitable? No., 21 January 2008
  5. Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end?  With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive.  No more trade deficit, and we can pay our debts.
  6. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  7. The US economy at Defcon 2, 11 March 2008 — Pretty self-explanatory.  Where are we in the downcycle?  What might the world look like when it ends?
  8. What will America look like after this recession?, 18 March 2008 – More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  9. Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
  10. Can the European Monetary Union survive the next recession?, 11 July 2008
  11. Big changes loom before us; why are they invisible to most experts?, 29 July 2008
  12. A look at one page of what lies ahead in America’s history, 7 August 2008
  13. “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
  14. Can you see the signs of spring in the coming of winter? A note about the recession., 10 September 2008
  15. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008

17 thoughts on “A look at out future, 2009 – 2010 … and beyond

  1. battleships might turn slowly, but they can capsize in an instant, and righting one the size of USA will be an almighty task.

  2. A contrarian perspective: “Roaring Twenties began with a Commodity Bust“, Justice Litle, Commodity Online, 6 November 2008.

    This article is interesting, and does not mention that the period 1913-1921 had Woodrow Wilson as president, who was replaced by Warren G Harding. Harding’s presidency, with the associated scanals (Teapot Dome), may be able to be described as ‘capitalism gone wild’. To build an analog: Bush’s neo-wilsonian presidency is ending in 1919 as opposed to 1921 after the end of the crisis, FDR with his promises of change was just elected in contrast with Harding and his promise of a return to normalcy, and the world’s environment and credit systems are so wrecked that it is impossible to drill, dig, or borrow our way out of the problem by pumping additional natural resources or untapped capital into it.
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    Fabius Maximus replies: This article is a nice example of the genera “historical factoid fest”, a gumble of this and that pretending to paint a coherent picture. This one discusses the 1920’s bull market without mentioning that little unpleasantness that ended in 1918 (from which the 1920’s was a rebound) or the massive wave of new industrial technology (in some ways more significant than that of any single decade).

  3. Anonymous: I read a similar article recently (sorry, no link) arguing that the deregulated environment we are now in (viz. the investment banking and finance sector) is akin to pre 1930’s era during which the booms and busts were both more pronounced and lasted longer, especially on the downside. So I agree that this is not as unprecedented as many now think.

    That said, I have felt for a couple of decades now that there would be global tipping point when the American economy finally got to the end of its long-term Phase One, which can simplistically be described as ‘growing a typical high-density population’ with all the growth that implies. This coupled with the non-coincidental concurrence of a) gold and silver being withheld from European merchants with which to carry out trade to Asia in the late 1700’s which spurred what later became known as ‘the Industrial Revolution’ so that b) as the American population expanded its growth was accelerated by being the first nation to build new infrastructure on the basis of such technological leaps forward.

    Those days of relatively easy expansion are over.

    Phase Two – in which the rest of the world will soon be involved as Europe has been for several decades and probably also Japan – involves stabilization, i.e. economies not dependent upon growth. In such a phase, the usury-based financial system, which exacts a 10% or more penalty on the entire economy equivalent to a higher national tax rate, needs to be replaced, not to mention a very different societal ethos and ethic. During this phase, there is a real role for true conservatives. Expect the Republicans to arise again, this time as proponents of
    a) strong (including culturally homogenous) local and regional communities
    b) reduced centralisation of both public and private/corporate type (which have recently become indistinguishable) and
    c) self-sufficient, non-polluting husbandship of natural resources.

    These are the sorts of priorities that make sense during a Phase Two.

    PS. Clearly, it is in the b) area above that Republicans sold their souls the past few decades, mistakenly perceiving the elite corporate sector as ‘private’ versus government being ‘public’. Once they figure out that overly centralized power systems are the core problem no matter which sector they are in, they’ll come roaring back. Big time.

  4. Good comments from Erasmus!

    FM: why do you persist in calling the bailout “socialism”? (“large-scale interventionism almost indistinguishable from socialism.”) What we have seen so far is “socialism for the rich”, or “corporate socialism.” The coordination of state with private business and wealth is more accurately called fascism.
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    Fabius Maximus replies: IMO while socialism is largely an economic system, facism is largely a social system. As Wikipedia says…

    “Fascism is a totalitarian nationalist ideology that advocates itself as being a third position alternative to both capitalism and communism. It seeks to form a mass movement of militants who are willing to engage in violence against their political opponents and groups or individuals that the movement deems to be enemies.”

    Socialism is government domination, short of total ownership, of the key elements of the economy. While corporate leaders might think the government is just helping out, I suspect they will soon learn that “He who takes the King’s shilling, does the King’s bidding.”

  5. So the New Deal was fascist?

    Not a fan of the corporate socialism going on here. But seriously, fascism involves a lot of other things too. Things that are much much worse than corporate socialism. Let’s keep a sense of proportion.
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    Fabius Maximus replies: Agreed. Socialism is primarily an economic view of life. Fascism is rooted in a vision of the people as a unitary body (e.g., the “Volk”), whose voice is expressed through a single leader. The facist playbook exploits people’s fears and dreams, as in the saying “villify, build hate, seize power.”

  6. FM: ‘obviously belief in “free market solutions” has not made the cut’

    Believing that a Gov. Supported Enterprise like Fannie Mae is “free market”, is as clueless about what free market means as Obama or, unfortunately, McCain. I think you know your are slandering the free market here.

    If the claim is that the Public Relations push to blame the free markets is going to be successful, that is more likely.

    If a GSE like Fannie Mae is going to change the rules and promise to accept risky loans, that isn’t the free market either. Nor, if other banks respond to the changed rules by also giving out more loans to more questionable credit risks.

    The distorted market response to stupid rules changes by the gov’t is not free market. Perhaps you argue that the $60 tr in leveraged debt, on top of $6 tr in excess house price bubble value, is the free market error? But it was only allowed to increase to that height because of the implicit gov’t risk guarantee — not the free market.

    Now that the Dems are totally in power, look to the MSM to begin figuring out that the problems they want talk about (to sell newspaper/ TV add) are caused more by gov’t, and Dem politicians. Yes, also Reps & Bush, and the free market some, but it’s elected Dems that have power and are thus worth blaming. (It was also the many millions of homebuyers who couldn’t afford the mortgages they were signing on to, sort of knowing sort of not caring, ‘knowing’ the prices would go up so they could get out before it was clear they were in over their heads. Those millions won’t be voting to blame themselves.)

    Look for Reps to begin fighting more bailouts. For instance, perhaps by requiring the UAW pension debts of GM to be converted into some kind of equity, perhaps as part of a bankruptcy proceeding.

    I totally agree that this is the end of the post WW II global debt super cycle in the West. I’m not yet certain about China and India (2/5 of the world.)
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    Fabius Maximus replies: This is brutally myopic. Still obsessing on mortgages, I see.

    Meanwhile, in the real world, the government is buying shares in insurance companies and banks. Rapidly becoming the largest buyer of short-term corporate debt. Guaranteeing not just bank deposits, but a trillion-plus in money market funds. And now corporations, like the auto companies, are lining up for bailouts.

    “Look for Reps to begin fighting more bailouts.”

    Yes, that would be the fast-track to total electoral defeat. Once out of office opposing what they did while in office — clearly defining themselves as part of the problem.

    “For instance, perhaps by requiring the UAW pension debts of GM to be converted into some kind of equity, perhaps as part of a bankruptcy proceeding.”

    Where do you get this stuff? Why would auto workers throw away their PBGC insurance in exchange for potentially worthless auto company stock. It’s not obvious that the auto companies’ value covers their bonds, who have precedence over their pension beneficiaries.

  7. FM I wonder if you have any comment on the apparent looting of the bailout as discussed by Naomi Klein (“The Bailout Profiteers“, 31 October 2008) When all is said and done, will the taxpayers have anything to show for the $700b, or will we just have tremendously more debt while the free marketeers build their Green Zones as we all fall down.

    Can the present emasculated government bureaucracy handle the job of dishing out a trillion dollars in a manner that protects taxpayers’ interests, or do we as Klein contends, just subcontract the job of bailing out the private sector (with public sector money) to a private sector company with a no-bid contract?
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    Fabius Maximus replies: Whatever the Bush Administration did (or does in the next few months), is less important than the large steps to be taken by the Obama team and Congress. Just like Hoover and FDR.

    “present emasculated government bureaucracy”

    Do you have any evidence for this? That the government buracracy has few bodies or less funding than 10 or 20 years ago? I very much doubt that is true.

  8. Sorry, I shouldn’t have used the “f” word. But, really, how can you call giving a trillion dollars to the major financial houses and GM, in the face of a major recession, “socialism”? And why imply that this is a dramatic shift in policy? All the measures that led to the financial collapse were put in place over the last twenty years.

    To say the government is gaining control over the private sector, because a former CEO of Goldman Sachs, as Treasury Secretary, has just awarded Goldman Sachs $50 billion, is a ludicrous misuse of language.

    Let’s keep the meaning of socialism clear; it’s a government for the benefit of everyone, not just the wealthy.

    The “shock doctrine” is a good way to describe the actions of the government so far — using widespread public confusion and fear to justify further looting of the Treasury. Good comment, Gary!
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    Fabius Maximus replies: No need to apologize for saying “fascism.” The downcycle is yet young; we may be talking a lot about it before this cycle ends.

    (1) “And why imply that this is a dramatic shift in policy?”

    There are no precedents for such government action since the 1930’s.

    (2) “All the measures that led to the financial collapse were put in place over the last twenty years.”

    Or longer. But the discussion is about government actions in response to the crisis. A “laissez faire” policy (e.g., the 1920’s) can have an interventionist coda (e.g., the New Deal).

    (3) “just awarded Goldman Sachs $50 billion, is a ludicrous misuse of language.”

    What’s ludicrous is to look at this tiny part of the government’s response — $50B of a trillion dollar set of programs, still growing — and treat it as the whole.

    (4) “meaning of socialism clear; it’s a government for the benefit of everyone, not just the wealthy.”

    Perhaps that is the description in “Socialism for Children.” In the real world almost all government programs are done for the benefit of the people. Communism, capitalism, fascism, even National Socialism (although the NAZI’s had a somewhat narrow concept of the “people.”)

  9. Not only is our current recession going to be difficult to get out of… it may be impossible to do so, or doing so may simply invite recurrence of the conditions that got us here. This is because when and if it is over we shall still have the oil water food population conundrum.

    Which is to say that given the number of people, it is impossible to have a reasonable standard of living for all of them given the way we currently use oil and water to make food and live life in general. Were the global recession to recede, we and the Chinese and Indians would go back to gobbling up insane amounts of petroleum for rather frivolous reasons, sending the price up, undermining the growth, and so on and so on ad infinitum.

    There is currently no direct way to address the population issue, but it says here that it certainly is time to figure out the scale and some sort of approach for addressing the oil water food situation. I see it as best happening on a county basis, a polity of enough size to be significant but small enough to be manageable and have some commonalities.

    The core idea would be to embark on county level carbon management as a major civic enterprise. An initial pilot program could select, nationwide, a representative number of counties, based on the resources they have, the geography, population levels and so forth… certainly a number at the level of say 200 or an average of four per state would probably get us there.

    Each county could then be characterized in terms of how much carbon it consumes as imported energy, and from where, whether domestic or foreign, and of what type. It could also be measured to see how much it puts into the atmosphere, and what it uses it for. One could then look at the alternatives in terms of biomass, water power, solar, what have you… and ways to capture the carbon currently sent into the atmosphere, and use it as fertilizer or in some other way to make food, other energy and so forth.

    Where I am in Westchester County, New York, there used to be a lot of farms. The county is on the railroad line to NYC, and most of it is reachable with a short drive of the sort that could be handled by an electric car. The water flows of the Hudson and Bronx rivers are currently being used for just about nothing, and a lot of biomass simply goes to waste. Of course the story would be completely different for more urban places, for more rural ones, for hotter and colder and so forth. But it seems obvious to me that looking at all of this and simply making some efforts to tweak the numbers and make them better and better would have immense value in the long run, and make it possible to have a better recovery than we would otherwise. For example, were someone to figure out a way to capture, using some sort of biodegradable filtration system, car exhaust or the output of power plants, such that it could be plowed into farmland and used to grow biomass that would then make biodiesel fuel, and if similar things were to happen in several ways and dimensions, then the US might get to a point (with few enough vehicles of sufficient efficiency) to get by on its own oil for gasoline.

    Now I’m no scientist, but the point is we need a new conceptual framework, and it has to happen bottom-up, and it needs to be serious. If someone has a better idea, let’s try that!
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    Fabius Maximus replies: I agree with this in general, esp the need for a new conceptual framework (I have said this in many posts). There is one problem with this is that one fundamental aspect of the problem is that our observation-orientation-decision-action loop is broken, IMO. This is seen in your first recommendation.

    “The core idea would be to embark on county level carbon management as a major civic enterprise.”

    I assume this is to control anthropogenic global warming. Unfortunately the scientific basis for this is not only weak, but weakening under examination. And there is tentative (very) evidence that the largely natural warm cycle since the 1970’s is ending. That would be unfortunate, since cooling has far worse effects, degree for degree, than warming on human life — people freeze during winters, crops fail from early cold snaps and late freezes.

    For more on this see the FM Reference Page on Science, Nature, and Geopolitics.

  10. FM: “In the real world almost all government programs are done for the benefit of the people. Communism, capitalism, fascism, even National Socialism .”

    You made my point precisely! Our government is supposed to be a democracy, not “capitalism”!
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    Fabius Maximus replies: If so it was accidental! Our political system is a democratic republic. Our economic system is a free market – government mix. Some systems (e.g., communism) combine both political and economic systems. So what does this all mean to you?

  11. FM, it would be great news if anthropogenic warming weren’t a problem… the concept behind working on a county level would still be valid, as the real vulnerability outside of warming is economic and military, and about energy. Anecdotally it would appear, for example, that what we currently do… grow, let’s say, tomatoes in California in the winter using petrochemical fertilizers, then transport them using still more oil to here on the East Coast… is a way lots of energy could be saved. Back in the day they grew vegetables in the Northeast using glass cylinders, called cloches, heated by the sun and horse manure… in the winter. Were we for example to find ways to reroute wasted heat from power plants into the soil, and waste carbon into the soil, and use those to grow food that would then eliminate all sorts of petrochemicals… well in my relatively fertile county, that would work, and could be a paradigm for others. Different counties, it seems to me, would have to look at different formulae for reducing the use of oil, for generating other types of energy, and so forth.

    Either that or we could find a humane and ethical and popular way to cut our population way down and get the rest of the world to agree… along with a flock of ponies, rainbow ones, with a single horn on their cute little foreheads;-().
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    Fabius Maximus replies: This illustrates one of our serious problems, widespread “orientation lock.” While demographers and economists study the coming population crash, esp. in developed worlds (excluding immigration), people still worry about population growth.

    Fertility leads population change, for obvious reasons. Although global population growth will continue for another generation or so, the fertility crash in almost every nation is well underway. Much of the first and second world (Japan, Russia, the Mediteranian nations, Eastern Europe) have fertility ratios under 1.5 (2.2 is aprox replacement, stable numbers), which assures (unless changed) a populations crashing in two generations.

    For more on this see
    * Spengler’s articles.
    * The FM reference page about Demography

  12. ‘Fascism’ and ‘socialism’ can never be precisely defined, at least as applied to real world manifestation. I believe Mussolini defined fascism as ‘the union of state and corporate power’. What this means to me in classical terms that King and Lords are united.

    However, they can be so because they loyally follow the King or because the King is their puppet, either of which lead to vastly different societies. So not all fascism is created equal.

    I believe socialism is when everyone shares in the gross national product and is an attempt to eliminate ruling classes. Going against a class system is denying human nature and thus cannot work. There has to be leadership. Any system that does not acknowledge the leadership principle is guaranteed to be dominated by corrupt, unaccountable leadership.

    I agree that what we have now is not government simply aiding or bailing out corporate sector but the latter increasingly controlling the former. This is why the Treasury and the Fed are always run by investment banker CEO’s. Similarly, corporate sector lobbyists revolving in an out of office in the Defense and other departments further demonstrate how the private sector is essentially running the government, steering legislation and expenditures to favour their interests.

    Corporate socialism, in this respect, is not a bad term. And it fits what Plato (?) warned when he said that democracy is the last step before oligarchy, essentially what we have now. That is the worst of all possible systems. Until this is definitively addressed, no substantive change is possible.
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    Fabius Maximus replies: To repeat what I said last time you gave this misinformation:

    This is a mis-representation of Plato. Wikipedia, as usual with this sort of noncontraversal info, expresses it well:

    {In The Republic Plato} “discusses five types of regimes. They are Aristocracy, Timocracy, Oligarchy, Democracy and Tyranny. Plato also assigns a man to each of these regimes to illustrate what they stand for. The tyrannical man would represent Tyranny for example. These five regimes progressively degenerate starting with Aristocracy at the top and Tyranny at the bottom. Each regime below aristocracy is worse than the one before. Aristocracy is considered the best.”

    The common quote from The Republic about democracy, liberty, and tyranny:

    “Democracy is undone by the same vice that ruins oligarchy. But because democracy has embraced anarchy, the damage is more general and far worse, and its subjugation more complete. The truth is, a common rule holds for the seasons, for all the plants and the animals, and particularly for political societies: excess in one direction tends to provoke excess in the contrary direction. … So an excess of liberty – in the state or in the individual – seems destined to end up in slavery”

  13. Good god, if “villify, build hate, seize power” wasn’t the doctrine of the Bush/Cheney junta then what was? When the Italian Fascists produced the Council of Labor it proclaimed absolute control of all factors of production by the state. That didn’t mean that a state representative watched and directed the craftsmen twisting screws into wood. But it did mean that the state and producers (i.e. big corpa)joined together in a “group” “bundle” or “club” to make binding economic policy decisions. The word derives from the Roman fasces, a bundle of sticks; the idea being (as I understand it) that sticks bound together are much more difficult to break than they are individually. Socialism? “A political and economic theory of social organization based on GOVERNMENT OWNERSHIP and democratic management of … production and distribution” (Websters unabridged 1921)(i.e. “rentals” are not allowed in a truly Socialist state, period). So let’s (just for fun) compare how our present system responded to Her Paulson’s bailout (which I was in favor of, not that it matters). Democratic management? With 95% of the population vehemently against it? Was this a “collective decision” or was it more like a very powerful “group” or “club” made up of representatives from our government and corporations making a decision which they deemed to be important economic policy for the good of the state? It’s Fascism, Baby, not Socialism (or at the very least it’s closer to Fascism than to Socialism). And we’re in the thick of it. Perhaps a better term is budding “Authoritarian Free Enterprise.” And it’s worked pretty darned well in China. As long as you don’t rock the boat politically you have a lot of economic freedom. Powerful. The wolf-lips of our new Fascist state are just beginning to curl back above shining white canines. It looks like Socialism, but America just isn’t wired for Socialism. But Fascism is another matter altogether. Just watch the crowd at a Raiders game. And If it’s “Socialism for the rich” it isn’t Socialism by definition (goddamit), it’s something else. In other words, any man who marries a woman for money ends up earning evey penny of it.

    “This is not a cyclical economic event. This is a historic cycle, the end of the post-WWII global geopolitical regime.” Oh Baby! It’s as if the Green Revolution had produced food that suddenly turned inedible on people’s plates. Wait till the somewhat-washed billions in developing countries (who snuggle in bed every night dreaming about a car and condo) discover that most of their economic development is a sandcastle of credit expansion. It’s going to be Phillis Diller ugly, or worse.

    There is too much debt. It has to be reduced. They WILL inflate, widespread default is not an option, just read Ben’s books. My guess is that as the world begins refusing our paper the fed will just buy it and inventory it. I would not be surprised if history shows that this process started some time ago.

  14. I cannot fathom why F-M and Dr. Roubini both dismiss the likelihood of inflation. If no buyers for the U.S.’s massive debt issues appear (as with China’s intent to spend its reserves on domestic stimulus), nothing will prevent the Fed from printing new currency to buy it all up.
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    Fabius Maximus replies: While it is always interesting to see such confident prophecy, I must note however that such confident prophecy is usually wrong.

    Esp as basic economic theory suggests that it is wrong, at least in the short term. During slowdowns the US savings rate increases — as do risk premia (a fancy way of saying that people and institutions do not want to take on risk, so they buy government bonds). The combination means that governments find it easy to run large deficits during recessions. Japan demonstrated this on an previously unimaginable scale during the 1990’s.

    The US seems likely to test this on an even larger scale during the next few years.

    In brief, these things are not so cartoonishly simple as Alfidi suggests. Hence I do not “dismiss the liklihood of inflation”; I just describe the various possible scenarios. Since I do not pretend to be Mr. Wizard, I just sketch the situation — and let readers set their own odds.

  15. Japan’s situation in the 90’s and Americas’s today are quite different. Japan had a huge surplus of savings, America is bankrupt and has a debt load the likes of which has never been paid off in history. To say that the onrushing recession will allow the US to borrow (sell paper)to finance a dramatic increase in our deficit is a suspect proposition.

    It’s like comparing an individual who has lost his job but has a hundred thousand in the bank to an individual who has lost his job and has a hundred thousand in credit card debt, and then assuming that a potential lender would consider them equivalent risks.

    And what’s all this “Mr. Wizard” crap. Everybody knows we are just expressing opinions here.

    How about the sentence “The magnitude and length of this downturn will be greater than economists expect…” This is an arguable point. It’s a logical and probably correct statement, but, if we follow the rule you seem to be imposing, you should change “will” to “may” or “might” or “will probably.” So if you’re going to make snide little rules, try to follow them yourself.

    As in the sentence “This downturn might initiate a long, slow process of change in the world economic and geopolitical orders…” where you correctly used “might” as per the rule you seem to be imposing.

    Love your site and analysis, by the way.
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    Fabius Maximus replies: Quite a bold comment, but I believe quite wrong. As it says on the About page:

    “Most of these posts discusses things on the edge of our knowledge and theory. For clarity, forecasts are stated in somewhat black and white terms. You can mentally insert the necessary qualifiers, the most important of which is ‘future is the unknown — all we can do is guess.’”

    So I use lots of “probably” and “might” qualifiers — along with bold statements intermixed with qualifiers like the “Mr. Wizard” statement. The paragraph you quote was immediately followed by “This is just a guess”. I think most folks get the point, without turning this into a dry as dust academic dissertation.

    You say “if we follow the rule you seem to be imposing”, but I am following this rule.

    (2) “Japan’s situation in the 90’s and Americas’s today are quite different.”

    Yes! And no! We are both suffering from debt deflation. We have a different mix of strengths and weaknesses in this struggle. Their far higher national savings rate (and lower leverage) gives them a much greater ability to fight it off. Deflation is potentially lethal for a high-debt economy like ours (lethal to our political economy, that is). For more on debt deflation see this post.

  16. “Deflation is potentially lethal for a high-debt economy like ours…”

    And this is why the MIGHT inflate.
    .
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    Fabius Maximus replies: We can say that more strongly: the Fed is doing everything in its power to induce inflation to offset the deflationary forces now at work. The outcome is unknown at this point. Japan’s struggle with deflation — now almost 20 years long — shows that deflation is difficult to stop once it takes hold.

  17. In our National Labs Controlled Nuclear Fusion(small H-Bombs) is scheduled to be achieved in 2009-10 and in Europe in 2014 and for the last few years they have been on right on target. Other similar programs have created fusion neutrons so this should work as planned. Fusion energy should produce clean energy at about the equivalent of 25 cents per gallon gasoline. It will take 5-10 years for commercial plants to become feasible.

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