A situation report about the global economy, as the flames break thru the firewalls

Summary:  The global economy continues to fall towards debt deflation (see here), rare and never cured (WWII was not a “cure”.)   This is a brief look at current dynamics, and the short and medium term futures.    At over 2000 words, it is already too long; supporting logic and evidence must await later posts.

This is all speculation.  I say this up front, to avoid having to fill the text with “perhaps” and “maybe” in every sentence.  I hope I these guesses are wrong.


  1. Global summary
  2. Asia
  3. What about the US?
  4. Looking ahead, what can we expect for America?
  5. Looking beyond the downturn, what can we expect?
  6. The big unknown
  7. Do you believe this forecast?
  8. Conclusions

1.  Global summary

Metrics of economic activity are almost all falling.  Many are falling rapidly; some are in free fall.

The world moves from a financial crisis — in which governments bail out banks — to a larger crisis in which entire nations must need bailouts.  Iceland was the first.  A long sick list is growing:  the UK, Ireland, Spain, Italy, and many emerging nations (esp in Eastern Europe).

2.  Asia

Asia, so dependent on exports, falls into a depression (often defined as 4 quarters with real GDP down 10%).

  • China GDP growth in Q4 was near zero, down from 13% in 2007.  (China reports only quarterly GDP only on a year over year basis; quarterly annualized numbers must be estimated from this.  See here for more). 
  • South Korea’s GDP was down  20% annualized in Q4.
  • Singapore’s GDP was down 16.9% annualized in Q4.
  • Japan’s exports declined at a 35% annualized rate in December, recording its 5th trade deficit in a row (the previous one was December 1981).  GDP probably fell at double-digits rates in Q4.

China is the keystone, the best hope for the Asian economy to stabilize later this year.  It’s high rate of growth and poor data makes relibale analysis impossible and comparisons with other nations difficult.  Zero GDP growth in Q4 means China has decelerated from 13% to zero over two years — a brutal stop.   Equivalent to the US going from +3% GDP to -9% (almost a depression).   Except that there are few safety nets for China’s people.

From another perspective, losing two years’ growth in 2009 would mean -3% GDP for the US (painful).  Since we have so much debt,  we might lose 3 or 4 years growth — which might force structural changes (default or inflation).

Losing one year’s growth is -9% GDP for China.  That would be an unthinkable disaster in the eyes of most economists.  Which is absurd.  Every economy frequently stumbles and loses a year’s growth — and China’s rapid growth means greater volatility, not less.  A big bust in China in 2009 or 2010 will be hailed as a “black swan”, and demonstrate (again) that myopia about the future is one of our greatest disabilities.

3.  What about the US?

(a)  US banks continue to die despite massive infusions (gifts) of free money from you and I.  As of December total bank lending is down slightly from October, but bank holdings of Treasury and Agency bonds at the Fed are up aprox $450 billion (see chart).  Borrow at near-zero, buy bonds with no money down = great work (if you can get it).  The sums required to adequately recapitalize them are preposterous.  Many of our major banks will be nationalized ( today’s NYT describes the Obama team grappling with the inevitable).

(b)  The inevitable crash of construction firms and commercial real estate will devastate small banks, so far only lightly singed by the devastation of the capital markets.  The FDIC is already preparing for this; even the mainstream media at last sees this coming (“Smaller Banks’ Losses Expected to Bring Mergers“, NYT, 22 January 2009).

(c)  Conventional monetary policy is exhausted from years of overuse (i.e., artificially low interest rates) during the Greenspan years.  Untested extraordinary measures will be tried (such massive printing of money to “peg” treasury bond rates); the unanticipated side effects might be horrific.

(d)  Massive tax cuts or “rebates” work fast but with astonishingly low level of effectiveness, as they will mostly be used to pay down debt or increase savings.  Only 17% of the $177 billion 2008 rebates was spent, slightly less than that of the 2001 rebate.

(e)  Massive spending increases will take years to have substantial effect.  Nothing gets built rapidly in America (see the new CBO report on the stimulus plan).  Worse, construction spending will benefit a small number of skilled tradesmen and a million immigrants from Mexico (attracting back many who left following the crash in housing construction).

(f)  Most important, fiscal stimulus is vital — but only acts as a palliative (alleviates pain without curing).  It does not and cannot not revitalize the economy.

4.  Looking ahead, what can we expect for America?

2008 was a financial crisis, affecting mostly “Wall Street.”  2009 will be the year “Main Street” gets hit.  The damage to the real economy so far is trivial to what will happen over the next two years.  There will be two big stories.

(a)  Business bankruptcies

Going into 2007 we knew that our financial sector was unusually strong, well-managed with strong balance sheets.  False!  Going into 2009 we know that our non-financial business sector is well-managed (outside of some weak sectors, like autos), with strong balance sheets.  Expect to be disappointed and astonished yet again.

(b)  Triage

Everybody wanst bailouts.  Worse, the expectation of bailouts means that few preventive measures will be taken.  It’s call moral hazard.  We see this at work in California.  Already de facto bankrupt, nobody gives an inch.  No lower government spending, no lower government wages, no reduced government employment, no higher taxes.  Why compermise?  The Fed will not let California go broke.  Or the auto companies.  Or the universities.  Or the banks and insurance companies.  Or millions of households.

There is not enough money to bailout everybody.  Triage will be necessary, like Kate Beckinsale does with lipstick on the foreheads of the wounded at Pearl Harbor (one of the saddest scenes in the 2001 movie). 

  • Those who will die anyway:  no treatment. 
  • Those who will recover anyway:  no treatment. 
  • Those will will recover only with treatment.

Making these harsh decisions might be Obama’s greatest challenge.

5.  Looking beyond the downturn, what can we expect?

The consensus confidently — almost to a man — anticipates inflation, against which the Fed will fight either successfully (optimists) or unsuccessfully (doomsters).  This is absurd. 

People are already preparing for this “inevitable” outcome by sifting to shorter-term debt.  As the end of the downturn approaches — inflation can only manifest itself only in times or full employment or via a currency crisis — everyone will take stronger measures.  Even elderly ladies in Peoria will own inflation-protected bonds, short-maturity bonds, and hoard gold bars in their basement.

These measures will foreclose inflation as a workable option.  As the government is forced to either issue vast amounts of short-term debt or monetize the debt, inflation becomes useless as a tool.  Short-term debt becomes an albatross during inflation:  interest expense skyrockets as interest rates soar.

Hyperinflation always remains an option, as does atomic war and mass suicide.  None of these are “solutions” in any meaningful sense.   With a history of vast deficits behind us and larger deficits ahead (from boomer’s retiring), the government will choose Door #2:  default.  We will just not pay all our obligations.  This is historically the most common solution.

How we decide who to pay — and how much to pay — will test America as it has seldom been tested.

  • Do we pay our foreign debts?
  • To what extent do we renege on promised social security and medicare benefits?
  • To what extent do we raise taxes vs. defaulting?

6.  The big unknown

The recession of the late 1920’s became a Great Depression due to a series of public policy errors (see here for more information).  Most seriously:

  1. many nations abandoned the gold standard too slowly, and
  2. the nation with the largest trade surplus wrecked the world trade system.

America was the culprit (for #2),  enacting the Smoot-Hawley Tariff Act in 1930.  We can only guess at the equivalent of mistake #1, but the prime candidate for #2 is China devaluing the RMB to boost its exports. 

7.  Do you believe this forecast?

Probably not.  Consider the many warnings by top individuals and institutions — over decades — that our fecklessness would eventually result in problems like today’s.  See We have been warned. Death of the post-WWII geopolitical regime for a few warnings during 2003-2006.

Or consider the responses to my post “The geopolitics of inflation, an introduction” (17 June 2008), in which I said:

For example, rapid global growth may increase consumption faster than capital investments can increase the supply of commodities. As food and energy consume more of people’s budgets, expenditures on other things must drop. Discretionary purchases go first, and so the economy slows as those business reduce spending (capex, headcount, hours, wage rates — it all adds up). Eventually some people cannot make their monthly loan payments (credit cards, auto loans, mortgages, etc). Now the financial sector suffers form rising defaults. This is deflation, caused by rising commodity prices and too-tight monetary policy.

Which is worse for a high-debt economy like ours, inflation or deflation? To grossly oversimplify… The 1970’s had the “great inflation”, a bad decade for America in many ways. The 1930’s had deflation, and saw the Great Depression.

… Fed Chairman Bernanake is an expert on the Great Depression, and well understands the danger of deflation to the United States. He — that is, the government — has powerful tools to fight inflation and deflation. However, success is not necessarily easy, painless, or guaranteed. There are other factors influencing the outcome, making it difficult for the Fed to induce inflation to offset rising commodity prices.

… Deflation can result from almost any destabilizing event, if it results in a contraction of bank credit — usually through loan defaults. Credit is a channel connecting the initial event — rising commodity prices, Asian inflation, or economic warfare — to deflation. That’s why the Central Bank response to even non-economic events (e.g., Y2K, 9/11) is so important.

When I wrote those words we were already — unknowingly — in the early stages of debt deflation.  Although many eminent economists were warning of deflation (see quotes I provide in the comments), the comments were uniformly hostile.

Your explanation on deflation seems plain wrong to me. … I can refer to my university degree on economics. (source)

Given the incentives (no one wants to owe money in a time of deflation), inflation looks a lot more likely. Given this, and our current situation, and absent some sort of financial sector collapse (and concomitant money supply contraction), I would have thought that deflation is very unlikely.

The current environment for the US dollar seems inflationary. The rising price of commodities suggests inflation. The current head of the Fed’s academic career suggests a predilection for inflation over excessive monetary tightness. Rates of interest vs rates of inflation suggest inflation. The US’s position as a debtor nation suggests that inflation is more likely than deflation, if the US government has anything to do with it. Your own analyses seemingly suggest inflation. (source)

This disbelief is significant.  We, as a nation, do not see the dangers described in this post (warned of by so many for so long) and so make no preparations for them (see this post for a powerful example).  Our myopia not only has brought us to the brink of disaster, but also left us unprepared for its consequences.   For more on this see:

8.  Conclusions

Economic booms and busts are the natural working of our system.  Busts resolve imbalances that we lack the wisdom or discipline to fix ourselves.  Such as Bretton Woods II “system”, a global economy built on insane and unsustainable borrowing by American households — who became for a moment in time 20% of the global economy.

Even now — two years into the downturn (starting with the December 2006 collapse of the mortgage brokers) fast action by the American people — through our businesses and government — can mitigate the downturn and lay the foundation for a strong recovery in 2011.  No situation is hopeless. 

Keynes, IMO the greatest economist so far in history, has words of wisdom that apply to us as well as in his time. 

We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of a far greater progress still. (source)

This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid.

We are as capable as before of affording for everyone a high standard of life — high, I mean, compared with, say, twenty years ago — and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time. (source)


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).

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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 interest these days:

Previous situation reports about the economy:

  1. The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle?  What might the world look like when it ends?
  2. The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
  3. Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
  4. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
  5. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  6. A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
  7. Status report on the financial crisis: we’re at a critical point in time, 10 October 2008
  8. Situation report: global economy, December 2008, 19 December 2008

47 thoughts on “A situation report about the global economy, as the flames break thru the firewalls”

  1. While I completely agree with your first statements, (“This is all speculation; IMO anyone making confident forecasts in this environment is delusional”) it sounds all too chillingly reasonable to me.

    1. this was only a regional problem or if
    2. it was coming at us from a more traditional source of trouble such as the 1973 oil embargo or if
    3. it was coming more slowly

    I’d say that we’d have a chance to contain the problem and the mainstream commentators wouldn’t be that far off the mark. Since none of the above statements are true, I’d say our goose is going to be thoroughly cooked for the next couple of years.

    My best guess (which hasn’t changed since September) is that we’re going to have a mild Depression but probably won’t know it because the government will skew the statistics to avoid public panic.

    Hopefully we’re both overlooking something fundamental and are wrong.

  2. My money is on the baby boom demographic getting what it wants. It has so far always been thus. In the 60’s we were young, and had sex, drugs, and rock and roll. The 70’s saw the hangover from the war and the 60’s. The 80’s we hit our stride and took off economically. The 90’s were a transition to middle age, and now we are finally getting old. As oldsters, we will want stable currency for living on fixed incomes, and peace and domestic security will be high priorities. Expect “Law and Order” candidates to prevail combined with deflation winning over inflation as baby boom politics dictates. Many mysterious happenings will make sense when viewed through this lens.

  3. Possibly some relevant reading for this situation? Includes Britain’s handling of their Napoleonic Wars debt of some 275% of GDP.

    Debt Sustainability in Historical Perspective: The Role of Fiscal Repression“, Mauricio Drelichman and Hans-Joachim Voth, Journal of the European Economic Association, April-May 2008 — Subscription required. Abstract:

    “This article examines the debt history of two contenders for European hegemony: 16th-century Spain and 18th-century Britain. We analyze their fiscal behavior using measures of overborrowing and fiscal policy functions. Our results suggest that stringency was not key for Britain’s success in avoiding default. Instead, fiscal repression allowed the United Kingdom to borrow at below-market rates, thereby outspending its continental rivals.”

    {FM note: Also note Drelichman’s website, with other relevant papers.}
    Fabius Maximus replies: Thanks for posting this!

    Unfortunately we have massive liabilities in addition to our debt. Debt results from past spending; the US government has committed to future spending beyond anything the 19th century UK could imagine. The present value of the Federal government’s total liability is aprox $60+ trillion. This will increase roughly $2T this year, to roughly 450% of GDP.

    State and local governments also have serious liabilities (i.e., that they cannot pay), although small by comparison with the Federal load.

    For more information see “The most important story in this week’s newspapers“, 22 May 2008.

  4. Geez with debit/income like this you’d think we could qualify for a nice low rate ARM.

    The problem, quite frankly, is and has been technology. With technology, we created efficiencies that ultimately do us in. No longer does each person eat from their own garden, instead we have our gardens collectively supplied to us by the Big Box Supply Chain. The BBSC used to employ thousands, but today only employs hundreds.

    We used to be fit and healthy and dead in our 50’s, except for a few. For the few there was a security net – social security. Today we’re fat and unhealthy and live to our 80’s, retiring in our 60’s, and straining the net with 20 years of flab.

    Deflation is not going to just be a currency requirement, but also a human standards requirement. I shudder at the thought of bread lines in 2009 or 2010, but too many people not enough jobs is a recipe for either breadlines, or pitch forks and torches on Pennsylvania Avenue.

  5. We have reached the point where we must design an economy that is not based on work.

    Of course, this is just the first indicator. Manual labor will make a comeback in the next twenty years, due to less people around who can do it. However, in those same twenty years, robot technology will also advance. Imagine a robot that can lay drywall, and bricks, and paint!

    It’s happening faster than I ever thought possible. Our technology is quickly making our biology obsolete.

  6. The best case is probably a negotiated settlement among the current superpowers… EU, US, China, Russia, India… that divvies up the remaining oil and negotiates our debt downward. Life here will transition back to an agrarian model that our Founders would be utterly comfortable with.

    The median case is that rational ways to settle this fail, and President Palin is elected on a platform of taking the remaining oil by force, and it works.

    The worst case is that debt cancellation and default, lack of energy to sustain the populace, and tribalism in general lead to a nuclear conflagration.

    Shall we start a betting pool? The only problem being that ‘worst case’ wagerers will probably be as unable to collect as they will be right;-).
    Fabius Maximus replies: I believe it is unlikely that “life here will transition back to an agrarian model.” As for a negotiations, that is discussed in “Effective treatment for this crisis will come with ‘The Master Settlement of 2009’

    As for your “median case” in which we successfully invade and take the Saudi oil, in Gerald Posner’s book “Secrets of the Kingdom: The Inside Story of the Secret Saudi-U.S. Connection” he says:

    “based on National Security Agency electronic intercepts, the Saudi Arabian government has in place a nationwide, self-destruction explosive system composed of conventional explosives and dirty bombs strategically placed at the Kingdom’s key oil ports, pipelines, pumping stations, storage tanks, offshore platforms, and backup facilities. If activated, the bombs would destroy the infrastructure of the world’s largest oil supplier, and leave the country a contaminated nuclear wasteland ensuring that the Kingdom’s oil would be unusable to anyone. The NSA file is dubbed internally Petro SE, for petroleum scorched earth.”

    Also see the NY Times book review here.

  7. Metrics of economic activity are almost all falling.

    “I have measured out my life with coffee spoons.” (J. Alfred Prufrock)

    Perhaps the problem is not with the economy but rather with metrics. What is is that we are trying to measure, anyway? What binds us to this?

    “Then comes my fit again: I had else been perfect,
    Whole as the marble, founded as the rock,
    As broad and general as the casing air:
    But now I am cabin’d, cribb’d, confined, bound in
    To saucy doubts and fears.”
    (MacBeth, Act III, Scene 4)

    “She should have died hereafter;
    There would have been a time for such a word.
    To-morrow, and to-morrow, and to-morrow,
    Creeps in this petty pace from day to day
    To the last syllable of recorded time,
    And all our yesterdays have lighted fools
    The way to dusty death. Out, out, brief candle!
    Life’s but a walking shadow, a poor player
    That struts and frets his hour upon the stage
    And then is heard no more: it is a tale
    Told by an idiot, full of sound and fury,
    Signifying nothing.”
    (MacBeth, Act V, Scene 5)

    Fabius Maximus replies: Just a guess, but I suspect here speaks someone who has never lost his job and been unable to put food on the table for his family. Lost his medical insurance. Applied for Medicaid and food stamps. Filed bankruptcy and lost things accumulated over decades. Those are the tangible aspects of economic metrics.

    The Macbeth quotes are appropriate, for we are the world’s King (for today), and are beset on all sides by threats — not the least of which is our poor mental state: a mixture of hubris, paranoia, and myopia.

  8. I’ve run into quite interesting and informative article (in spite of its title):
    “Hyperinflation will begin in China and destroy the dollar”, by Eric deCarbonnel (profile), posted at Market Skeptics, 18 January 2009. Even more interesting is subsequent discussion with Mike Shedlock (all in comments). It’s all about deflation versus inflation/hyperinflation in foreseeable future.
    Fabius Maximus replies: I see nothing in this that suggests that the author knows what he’s talking about. It’s just a mish-mash. As for Shedlock, he runs an interesting site — but also IMO displays little understanding of economics. There are far more valuable sources of information and analysis out there.

    I suggest looking at the blogs on RGE Monitor. Every day they give an assortment of the sharpest thinking on the Internet about finance and economics.

  9. FM note: I recommend reading this comment, displaying the moral decay inside America. Let’s hope we can fight off this rot.

    FM, if you can project a probable energy future that still has people on the East Coast eating what Kunstler calls the 3000 mile salad in 20 or 50 years, I’d like to hear where the oil and water are going to come from to support that. I can’t see it and think it would actually be a good thing to have an agrarian renewal. But that may be mere romanticism on my part.

    I do recall your post on the Master Settlement of ’09 and think it has much merit financially… but the energy situation will have to be addressed as well, eventually, or the money agreement won’t matter.

    That potential information about the Saudis is interesting… for one thing, they don’t necessarily have to do that, but merely say they have, to reap a lot of the deterrent effect. Secondly one would have to assume that, as with our nuclear arsenal, stringent fail-safe measures would have to be in effect to prevent accidents, malcontents, or terrorist infiltrations from setting it off without official sanction. Thirdly, having taken, let us say, the oil in Nigeria, Venezuela, Iraq and Iran, President Palin could simply blockade the Saudis and offer them the alternative of our price, or blow their own stuff up and be done with it.
    Fabius Maximus replies: How simple it looks — but how strange that for the past 400 years big-time aggressors have almost uniformly failed. But there are always folks who sketch out rosy futures, prosperity easily gained at gunpoint — then cry “it’s not my fault” when their nations suffer as a result.

    Also, such confidence, to forecast what technology will look like in 50 years! I am lost in admiration, but consider such speculation a waste of time. Look at the FM reference page Peak oil and energy – studies and reports; you will see that we have many potential energy sources. However, research must be adequately funded (rather than the faith-based policy relied upon in America by both Right and Left).

    BTW — I doubt the East coast will be short of water in 5 or 50 years. With a tiny sliver of competent management, it has lots of water. And the region can grow far more food than it does today

  10. The USA, and the world, has had too many bankers for many years, and even had big employment growth in that sector, as it leveraged up the capital to over $60 tr, much of it now ‘fictitious’.

    The USA should stop collecting tax, and print money, until there is a quarter of growth.

    Such reduced taxes will be saved and consumed both, with the voter-taxpayer individually benefitting from either path.

    The growth of gov’t is one of the most deadly long term trends, because so much gov’t spending is consumption/ waste, and so little of it is investment in the future. Fast investment usually requires a lot of waste.

    FM says: There is not enough money to bailout everybody.
    The Fed can print more, and doing so is better than the triage.

    If the gov’t decides who is to live, then the bailout cash will go to the most corrupt, to the biggest political donors, often to those who most deserve to die — like Chrysler and GM.

  11. Fabius Maximus replies: Just a guess, but I suspect here speaks someone who has never lost his job and been unable to put food on the table for his family. Lost his medical insurance. Applied for Medicaid and food stamps. Filed bankruptcy and lost things accumulated over decades. Those are the tangible aspects of economic metrics.

    So much for my plans to become a starving artist. (And -yet- you previously have denounced Bohemianism!!! )

    Your ad hominem argument (the details to which I decline to respond) concedes that this subject matter ultimately is subjective – hence unmeasurable – rather than bound by some objective metric.

    Upon which basis I now conclude that I should read Measure for Measure – a point probably more valuable than most derivatives nowadays.
    Fabius Maximus replies: It was not strickly speaking an ad hominem arguement, in that this was not a rebuttal. It was an illustration of the significance of economic statistics. Of course human suffering is subjective; feeling others’ pain is seldom easy for most people. Your personal experience is not really relevant, just a touchstone.

  12. I am astonished, that throughout all the endless pointification, that no one has made the connection that all this, is precisely what Ossama Bin Laden had intended with 9-11 being the catalyst to humble western civilisation.

    We haven’t had a major terrorist attack on US soil since then, because it hasn’t been nessesary, as the plan has unfolded almost flawlessly and all the damage since has been self inflicted, by over reaction, and failure to adapt.

  13. Curious that you cite as evidence of Keynes’ greatness (a judgement I share) the paragraph in which he predicts that the standard of living in “progressive” countries will be four to eight times the present in 100 years. Is the standard of living in America greater now than it was forty years ago? Will it be five years from now? Seems like we will have a lot of catching up to do to even reach the levels of 1965.

    Most of the commenters here seem to agree with your pessimistic forecast, and I can’t find any reason to argue with it. The interesting question might be, what will the social and political ramifications of a long Depression be? Reaction, revolution, or muddling through?
    Fabius Maximus replies: On what material basis can you say that the standard of living is not higher now than 1968? For most people they live longer and in better health, live in larger houses, have more and better cars, etc.

    Note that Keynes is clear that material things are just one component of life, discussed at length in “Economic possibilities for our grandchildren”, originally published in The Nation and Athenœum, 11 and 18 October 1930.

  14. Seneca,
    Are you joking? In what world do you live in which our standard of living in America is below the levels of 1965? The standard of living has risen in almost every material catagory since 1965.

  15. While I agree the US is not heading back to an “agrarian model” it would be a very good thing to have a new and this time really successful Homestead Act that encouraged the development of organic farming that returns some sanity and health to our food chain. Famine has always been caused not by scarcity but by disruptions of the food chain. The potential for that is becoming huge and should be reversed. Also need a total overhaul of food subsidies which have contributed mightily to deterioration of health in America. Overeating is certainly the first cause but what the sugar and corn subsidies are terrible incentives that multiply costs throughout society out of any proportion to the value they contribute. Better to wear fur and eat local.

  16. “We will just not pay all our obligations”
    While this may happen, I would bet door number #3, Print till the cows come home.
    Fabius Maximus replies: You must have missed the section where I explain why that is not a simple or perhaps even feasible solution.

  17. FM: “US banks continue to die despite massive infusions (gifts) of free money from you and I. As of December total bank lending is down slightly from October, but bank holdings of Treasury and Agency bonds at the Fed are up aprox $450 billion (see chart). Borrow at near-zero, buy bonds with no money down = great work (if you can get it). The sums required to adequately recapitalize them are preposterous. Many of our major banks will be nationalized (today’s NYT describes the Obama team grappling with the inevitable).”

    Yeah, it should be easy for a bank to make money — it’s as easy as sitting by the terminal and watching the numbers go up. And, you know, we could build new banks a for a lot less money than we’re spending now to keep the dinosaurs alive. The problem with nationalization is that we collectivize all these bank obligations, and who knows how much this really is. Do we really know the scale of the bad loans on the books at banks? Is it trillions, is it 10s of trillions? There is no openness here at all, and this is killing the economy. I’ll bet one day Paulson did the math on his $700B versus the scale of the problem, and just gave up and decided to patch as best he could until Obama came around. The Merrill Lynch fiasco has proven that mergers are not the solution. Combine a bad bank with a not so bad bank and you get a larger bad bank. Bank of America just got murdered for no good reason.

    The scale of these bank problems we’ve seen up to this point are already hinting at the ‘nation destroying level’ — large enough to dwarf the US income tax base. The $700B bailout, versus $1.5T income tax/year — we can’t do a lot of these. All this money and we might still be only delaying the time at which the house of cards comes down, and then it’ll be the banks and the dollar both.

    Really, maybe we just have to let what is already dead die. I’m thinking we take these banks through bankruptcy, and pay out depositors through FDIC, and let a judge sort out who is owed what. The government could run the insolvent banks during the process — after which we’d apply a minimum necessary infusion of government money to rebuild a new bank that can survive in the aftermath if there’s no one around to fill up the market share. The point is the bankruptcy spreads around the pain a bit more, rather than focusing it all on the US taxpayers. I am concerned that with all this debt, the USA will just break, and we won’t be able to fix it (Iceland). We have a lot of crappy banks, but we only have one USA.

  18. I would like to ask a question about 3(D). What would your thoughts be about making tax rebates using scrip (http://en.wikipedia.org/wiki/Scrip). Scrip can be created so that it cannot be invested or be a store of value. Unless it is used, it is taxed or loses value.

    While it is not perfect and there would undoubtedly be transfer effects (money that would have been spent would be invested and replaced with scrip that is spent), but if the goal of tax refunds is to increase the velocity of exchange, scrip may do this more effectively than sending checks.

    My 2 cents worth, or 1.5 cents after 90 days.
    Fabius Maximus replies: Times of stress always produce a wealth of crank solutions. This is one, IMO. We already have one form of script, called US dollars. We don’t need more.

  19. Re: My claim that US standard of living not 4 times higher than 1965.

    In my recollection, union membership peaked in the 60’s. Real wages stopped growing around then and have remained stagnant since. Starting with Reagan, a sustained cutting back on government social programs, including welfare under Clinton, and promised social security and medicare reform under Obama. Single breadwinner families a thing of the past. Downsizing labor force and speed up in workplace. Movement of major manufacturing overseas. Pension funds raided by employers, and employee benefits reduced. Health care and insurance costs skyrocket. Income disparity grows geometrically in recent years. Americans work longer hours with fewer benefits (and much shorter paid vacations) than European counterparts. Humanities eliminated from public school curricula.

    Against these we can weigh increased home ownership and rampant consumerism, both collapsing under a pyramid of debt.

    My father in law is 90 years old and living comfortably on a union pension with full health care. My kids will never be so lucky.
    Fabius Maximus replies: Looks like you are “moving the goalposts.” In comment #13 you said ” Is the standard of living in America greater now than it was forty years ago?”

    Now you discuss “My claim that US standard of living not 4 times higher than 1965.” Does anyone claim that the the standard of living in the US has increased 11%/year since 1965? That’s 3.5%/year.

    Keynes’ baseline was the 1930’s. Things are vastly improved during the past 70 years, esp for urban poor and people in rural areas. The Rural Electrification Administration (created in 1935) might have increaed the standard of living 4x for its clients just by itself. For example, women were old by age 30 from the brutal work, such as drawing water from wells.

    As for your children, people in the West have been predicting doom for their children for centuries. They will not find work on the farms! They will not find work on the assembly lines! Etc, etc. Each generation we find solutions. That does not guarantee success in the future, but suggests that your certainty of doom is unwarranted.

  20. “As the end of the downturn approaches — inflation can only manifest itself only in times or full employment or via a currency crisis — everyone will take strong measures.”

    Don’t you think a collapse of the U.S. bond market would trigger a dollar crisis? Germany recently experienced a bond auction failure.
    Fabius Maximus replies: (1) The “bond auction failure” in Germany was not significant.

    (a) These are rare events, but not extraordinary. Per the Financial Times: “Before the seven that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.”

    (b) It indicates a glitch in the capital flows of the economy — national, perhaps even global — but not necessarily a serious glitch. This is just another aspect of the severe torgue on the economic appartus of the world, and not the worst such.

    (2) Why would the US government bond market “collapse”? During recessions (esp deflationary ones) government bonds do well, and there are few other attractive assets.

  21. FM note: There are several striking things about this comment.

    (1) Most important: at almost 2000 words, this is 8X the 250 maximus length given at the end of each post in the the FM site’s Comment Policy page. And 2x the length of most posts on this site. I”ve edited it to a still too-long 570 words. You can see the full text here.
    (2) While continuing a topic mentioned in the comments, it is also peripheral to the topic of the post.
    (3) Once past the opening, much of this is probably wrong. For example, of his 7 points, only #4 is clearly correct. The others are not correct for the bottom 60% of the population in 1968. He ignores the grinding poverty for much of the elderly and lower classes. Despire what he implies, a relatively small fraction of US households (citizens) are involuntarily without some form of medical insurance (private or governmental), and even fewer for over 30 days (this is still unnecessary and crazy, of course).

    It’s clearly obvious that the standard of living in 1968 was vastly higher in 1968 for the bottom 80% of Americans, so self-evident that Himalayan mountains of evidence proclaim it.

    However, before we start summarizing that overwhelming evidence that shows America’s standard of living was much higher in 1968 than today, let’s add a caveat. We’re talking here about the bottom 80% of Americans. If we turn our attention to the top 20% of Americans, there’s no doubt that this tiny cohort has immensely improved its standard of living over 1968. Consider the evidence for this second point: the income of a typical CEO in 1968 was around 30 times that of the typical assembly line worker, whereas today’s it’s around 200 times the assembly line guy’s pay. … Being in the top 20% of America’s economic pyramid was nice in 1968, but it’s obscenely opulent today.

    Now let’s briefly summarize the overwhelming evidence proving that America’s standard of living has plunged since 1968:

    [1] In 1968, wives didn’t need to work. …
    [2] In 1968 jobs were plentiful because of the dearth of children born during the depression. …
    [3] College cost next to nothing and represented a golden ticket to a high paying job. …
    [4] Adjusted for inflation, real income for middle class families has dropped by 5% since 1970. …
    [5] Job security has collapsed since 1968. Union membership has plummeted by 40% in the private sector since 1970
    [6] In 1968, almost every moderate to large-sized company offered generous pensions and benefits. …
    [7] In 1968, there existed almost no such thing as “the working poor.” …

    Nowadays, vast rings of working poor living in their cars and living in campers surround all America’s major cities. …

    Let’s debunk the most absurd claims, such as “the average American lives longer today than in 1968.” That’s because people today grew up with better nutrition. Unfortunately, if you get serious ill today, you will die, because no hospital will accept you without health insurance — which you don’t have, of course, because you can’t afford it. …

    Let’s add some more caveats here. I’m talking about middle class white males. For women, real income has risen since 1970, unless they’re single working mothers. For black women and black men, income as well as job prospects have immensely improved since 1970. … So for those groups, there’s been a very real improvement in that sense since 1968.

    Don’t mistake the plethora of technowhizbang gadgets today for improvement in quality of life. … A 60 inch plasma hi def TV isn’t a meaningful improvement over a 13 inch CRT TV, especially since there’s nothing to watch on tv today — the quality of TV programming has plummeted even while the technology has gotten better. In fact, in the area of consumer electronics, the gadgets get worse every year. …

    Cars have gotten much worse and much harder and more expensive to repair since 1968. … You could quickly and easily repair most of the household appliances you owned in 1968, and they were built like tanks….

    Unless you’re black or a single woman with a child or in the top 20% by income, life has gotten a whole lot worse since 1968, and the statistics prove it overwhelmingly. Anyone who tries to claim otherwise is either deluded, fantasizing, or simply hasn’t looked at the facts.

  22. FM:”Japan’s exports declined at a 35% annualized rate in December, recording its 5th trade deficit in a row (the previous one was December 1981). GDP probably fell at double-digits rates in Q4.”

    For me, personally, this is kind of where I’m throwing my efforts. That is I’m studying the Japanese language and learning Kanji. The Yen is up — could the Yen become the reserve currency of choice these days? With US interest rates and Japanese interest rates so low, investors are pulling their money into Yen.

    I have run into Japanese who are considering coming here and spending money because everything in the USA is so cheap. I’m anticipating a mini-tourist boom to San Francisco, Seattle, Los Angeles, and Honolulu, come this next summer — doubly so if oil prices remain low and the fuel surcharges on airlines finally come down.

    Talk to Japanese guys, and they do sound like it’s the end of the world, though they always seem to talk like this. From my seat here in the USA, Japan doesn’t look that bad. Their exports are way down, but there is more savings in the system over there to draw down. Birthrates are down, but that means that the unemployment pressure will be less severe. Their banks are slightly less dead than ours, Toyota, is slightly less screwed than GM, I think. Unlike China, Japan is done with the migration of people to the cities and all this transformational chaos.

    FM:”China GDP growth in Q4 was near zero, down from 13% in 2007.”

    The Obama-ites really did set off a firestorm in the Chinese blog-o-sphere with the talk of currency manipulation. Just the hint of the USA trying to ‘push around China’ set off a lot intense feelings. The exchange rate is getting politicized, and when things get political, nothing ever gets resolved.

  23. While “Economic booms and busts are the natural working of our system.” these cycles overlay and obscure the globalization of capitalist production. It seems to me that all this focus upon the individual nations and their individual national crises of over-production distract from the current unique position of global over-production.

    The Imperial capitalist project had reached its conclusion in 1972 with the opening of China. It’s no coincidence that so many current negative indicators initially date from that period.

    The only way forward is into the new. At this point every effort to go backwards can only increase the pain until new social relations can be established. Every effort to maintain business as usual only destroys nonrenewable resources needed to build new systems.

    All the indicators are there but a great deal of effort seems to be put towards misinterpreting the indicators and then rationalizing the gap between the indicators and the (mis)interpretations. IMHO, this effort would be better spent in seeking true alternatives rather that beating upon a dead horse.

  24. FM, my comment about President Palin was meant to be utterly ironic and absurd… I think that would be ridiculous, as she is… but it would not surprise me if the Confederate remnant would want such a thing in a few years, if Obama does not do well enough with the economy. In the future I will label such things as ironic absurdities to reduce confusion. We would be better off electing a cabbage than that woman, in every dimension… at least there are good things you can make from a cabbage.

    The fact that the East Coast has water supports my thesis… that’s where I live and I state we’ll have to grow a lot more food here. The point is if you analyze the food chain as it now operates, petrofertilizers grow food on irrigated land in California, which is transported to the East Coast at great cost in petroleum. I say that there will neither be sufficient water in California, nor sufficient petroleum to fertilize there and then transport the food, before very long.

    Wherever you draw the line… it may be in the 19th century as you have posited, or in the 20th… at some point technological and medical development created a singularity that is qualitatively different from prior ones in terms of human population growth and ability to use automation to exhaust resources. We could certainly have a lot of energy were we to liberate the hydrogen in our oceans… the problem is how to do that, because as of now it takes more energy to do that then one received from it. If you are betting on some person in a room or some committee coming up with some alchemy that will save humanity, I will take that bet. It says here that basically what you see is what you have to work with. It’s gonna be hard.
    Fabius Maximus replies: My apologies for misreading your comment. It was obviously ironic. I took it seriously because such views are too common among Americans (and I have a post discussing this in the pipeline).

  25. What’s really scary is that some of our traditional measures of economic vitality are entirely too optimistic. Take the DJIA for example. According to FT.com, Dow Jones is not kicking the sub $10 stocks out, so the average is distorted and not performing poorly enough to reflect the actual conditions in the field. Here’s an excerpt explaining their point.

    “The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower. The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos.”

  26. “The Imperial capitalist project had reached its conclusion in 1972 with the opening of China. It’s no coincidence that so many current negative indicators initially date from that period.”

    An interesting point. The other bellwether events from that time are the Arab oil boycott, the defeat in Vietnam, and Watergate.

    “Now let’s briefly summarize the overwhelming evidence proving that America’s standard of living has plunged since 1968:”

    Elizabeth Warren has presented evidence much to the same effect.

    I now present the following essay, which fully describes the current economy:

    Humpty Dumpty sat on a wall;
    Humpty Dumpty had a great fall.
    All the King’s horses
    And all the King’s men
    Couldn’t put Humpty together again!

    I reject any allegation of plagiarism with respect to the above essay. Such allegations would reveal undue obsessions with intellectual property, which is part to the Humpty Dumpty thinking that plague modern society.

  27. And about that recent thawing we’ve seen in the credit markets. Not all of the money to accomplish that has come from programs akin to TARP. According to the UN, not all of the recent bank rescues were metaphorical drug deals.

    “In many instances, drug money is currently the only liquid investment capital,” Costa was quoted as saying by Profil. “In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor.”

    The United Nations Office on Drugs and Crime had found evidence that “interbank loans were funded by money that originated from drug trade and other illegal activities,” Costa was quoted as saying. There were “signs that some banks were rescued in that way.”

    Sorry if this stuff talks down the economy.
    Fabius Maximus replies: Nice to see that at least one part of the private sector is thriving.

  28. Re FM comment: “Now you discuss “My claim that US standard of living not 4 times higher than 1965.” Does anyone claim that the the standard of living in the US has increased 11%/year since 1965?”

    ‘Lil factoid: to get fourfold increase over 40 years is 3.5% per annum, not 11%.

    There is no definitive argument about raising standards of living; too many abstract values in the equation. However, one can say the following:

    1. Relatively speaking the bottom 80% has been losing ground compared to the top 20%; also the class structure has become increasingly more rigid with less upward mobility.

    2. Even so, one could argue that the bottom 80% are still better off than they were (however you measure such an immeasurable). But I am not sure that both spouses having to work is progress, not sure that most non-immigrant families have below replacement birth rates, not sure that cultural quality has improved substantively, and so forth. Above all, I guess the point is that it is not easy to measure such things and a good case can be made either way.

    That said, I believe a higher percentage of people now live below the poverty line and for those in urban wastelands and moribund small towns this is probably worse living in many ways than the equivalent back in the pre 60’s era. For most lower percentile people, health care has not advanced considerably (setting broken bones and prescribing antibiotics is still about all you’ll get just as before. Most advances have been for ‘high-end’ solutions – and far too many of them are bogus anyway).

    (This is America under discussion, not Europe which is a far different story the past 40 years in terms of such metrics.)
    Fabius Maximus replies: Thanks for catching the math error (really big error). I have corrected the text above.

  29. I don’t dispute we may be in a depression. In March 08, our capital equipment business seized up rather mysteriously. Sales went abruptly to zero and nearly bankrupted us. Several of our large suppliers went bankrupt. In hindsight, this was the “Heart Attack” hitting the capex community. But now, our business is fine. Booming actually. Capex may turn down again as the firewalls crumble, but for now, life is good. Right now, the consumer is AWOL, and bank balance sheets are a train wreck, and global synchronicity is the third whammy hitting us. I am therefore glad to report that capital spending has not yet fallen. We don’t need a fourth whammy to hit right now.

  30. I’d like to quibble about point 3d). I don’t think it really matters if some or most of a stimulus is saved or used to pay down debt. It is true that by paying down debt or saving, taxpayers are handing money to the banks; but the government has already decided to hand out money to the banks, so why does it matter if citizens get to see that money first?

    There are two classes of people who would like to be bailed out from the stupidity of the last decade; borrowers and lenders. So far, the government has been helping lenders by giving money directly to the banks. The banks are paying off their investors and turning over their loan portfolios to the government. The government is pretending that the borrowers will repay those debts and thus there is no need to raise taxes (they might even make money).

    If we were to give money to the borrowers, they would repay the bank, then the bank would repay its investors. In this case, money given to the bottom will either trickle up to the bank’s investors, or it will get spent and boost the economy; seems like a win in either case. We shouldn’t be too surprised that the government has chosen a course of action which immediately bails out the top level of the financial system while arguing endlessly about whether to help the bottom. But I’m surprised at economists and other commentators who argue against stimulating the bottom of the debt chain; I don’t see how it helps to bail out lenders alone when we could give money to borrowers and bail out everyone instead.

  31. FM note: This is worth reading, showing how people with no particlular facts to support their views — other than intensive propaganda in the mainstream media — express sublime confidence, sufficent to denouce other views without bothing to give any facts. They just know!

    FM: “Despire what he implies, a relatively small fraction of US households (citizens) are involuntarily without some form of medical insurance (private or governmental)”

    I’m not an expert, I only know what I read. I’ve never read or heard anyone say anything like the above before. Somehow, that statement has the stamp of the same thought factory that claims that polar ice isn’t melting.

    Anyway, I’m honored that Erasmus, Electrophoresus and (maybe) Duncan seem to be on my side.

    The essential argument is whether Keyenes’ optimism about capital’s ability to grow over a long time horizon is warranted, or whether capital has finally exhausted its tricks — or, as Greg points out, has run into a wall of nature’s limits.
    Fabius Maximus replies: I suggest you upgrade your information sources, as neither of your comments appear correct.

    (1) “I’m not an expert, I only know what I read. I’ve never read or heard anyone say anything like the above before.”

    You don’t cite any basis for your certainty. I don’t have time to extact the data from the many studies on this subject, but let’s consult the US census.

    From “A Income, Poverty, and Health Insurance Coverage the United States: 2004“, pages 16-21:

    Of civilian non-instutitionalized population of the US (ex-prisioners and military):
    * 15.6% were without health insurance when asked in 2004.
    * 57% of the uninsured were 18-36 years old (for whom heath insurance is not cost-effective for people in good health with low assets)
    * the rate for foreign-born was 34%.
    * the rate for non-citizens was 44%.

    The Census does not calculate the number all of US citizens (including military and prisioners) who are involuntarily w/o medical insurance for over 30 days, but these numbers suggest it is probably under 10% (perhaps even under 5%). There are other studies that do so, after crunching these numbers in greater detail, but this gives a first cut at the problem.

    To recap, electrophoresis said in comment #21:

    “Unfortunately, if you get serious ill today, you will die, because no hospital will accept you without health insurance — which you don’t have, of course, because you can’t afford it.”

    In reply I said “a relatively small fraction of US households (citizens) are involuntarily without some form of medical insurance (private or governmental), and even fewer for over 30 days (this is still unnecessary and crazy, of course).” Does electrophoresis have any data to support his claim, or you to support your comment in favor of it?

    (2) “Somehow, that statement has the stamp of the same thought factory that claims that polar ice isn’t melting.”

    It’s not melting (the exact trend is uncertain). For a non-technical explanation see “Sea Ice Ends Year at Same Level as 1979“, Michael Asher, DailyTech, 1 January 2009

    This was confirmed by a note in The Cryosphere Today, published by the Department of Atmospheric Sciences at the University of Illinois (here), although they disagree about the climatic impact of ice changes at two poles.

    This lies on the edge of what we know about climate dynamics. For a detailed discussion of one theory (south polar ice is more important) see “Polar Sea Ice Changes are Having a Net Cooling Effect on the Climate“, Steven Goddard, Watts Up with That, 10 January 2009.

  32. Jim Summers:”I don’t think it really matters if some or most of a stimulus is saved or used to pay down debt.”

    Well, it’s the Keynesian issue of the ‘velocity of money’ — the idea that money spent directly by the government makes more jobs than money given to people, because we’ll save it and pay down debt. I think for the quantity of stimulus needed, as is mentioned by FM above, they’re running into real limits as to how fast this money can be spent.

    Jim Summers:”But I’m surprised at economists and other commentators who argue against stimulating the bottom of the debt chain; I don’t see how it helps to bail out lenders alone when we could give money to borrowers and bail out everyone instead.”

    The whole thing is absurd. Nobody mentions anything about the velocity of money when the Fed hands out $45Billion to Citigroup and guarantees another $300B of their crap assets. All that cash goes to these bank to just sit there and grow moss. The consumer is bleeding, but no, we can’t help the consumer, they might save the money (which they won’t). Better to give it to banks so they can sit on it and do nothing with it.

    Here’s a clue: Consumers will use the money to survive. That’s where tax cuts will end up. It will go right back into the economy to pay living expenses.

  33. Jim Summers is right — tax cuts now for all means more money to spend/ save/ invest/ speculate, as the individual chooses.

    Cathryn, the Big Banks also want to survive — but they’re insolvent. Their derivative bet/investment assets, if valued at the market price, means they don’t have any assets. So any cash they get in bailout goes into their Tier 1 capital to avoid bankruptcy.

    There should be more pre-packaged Chapter 11 bankruptcies, wiping out the shareholder investors, and most bond holders.

    FM, where is your link? Only 17% of the $177 billion 2008 rebates was spent, slightly less than that of the 2001 rebate.

    I actually doubt that the net savings of rebate receivers went up by $140 bil. However, if your savings wealth, including home equity and bank savings, had been $800 000, but after the crisis it halves to $400 000, so you put your $50 000 rebate into the bank to have $450 000 and only a $350 000 in reduced savings — was that spent or saved?
    How can the amount ‘spent’ be separated from the amount saved if the values are defined based on savings value changes. Had they had 800k in savings before and after, one could claim the entire rebate was spent.

    Tax Cuts Now — fast, direct, no new bureaucracy, no need for an EPA to get boondoggle construction going.
    There is no better policy.

  34. Tom Grey:”So any cash they get in bailout goes into their Tier 1 capital to avoid bankruptcy.”

    Yeah, reverse-Keynesian policy to the extreme. Let’s suck a pile of money into the bond market and then bury it all in bank reserves where it’s never to be seen again. This should help kill whatever meager ‘velocity of money’ is left in this economy.

    Tom Grey:”Tax Cuts Now — fast, direct, no new bureaucracy, no need for an EPA to get boondoggle construction going. There is no better policy.”

    Yeah, well, tax cuts don’t quite fit into the current narrative. Bush excess, and all this, blah, blah, blah. We’ll be lucky if we can just avoid tax increases from local and state governments trying to keep their boom-level spending levels going. New spending aside, as unemployment increases and profits fall, we’ll need huge deficits just to keep the government sector running at current levels.
    Fabius Maximus replies: Tax cuts have a place in the mix, but they have a very low level of effectiveness. Much of the cash is saved, giving little stimulus. Nor do they mitigate the suffering effectively, as they do not flow to the unemployed.

    This debate is sad, a terrible display of ignorance — as these things were hashed out in theory and tested in the Great Depression. It illustrates America’s inability to learn from our experience, one of the weaknesses that brought us to this point.

  35. One of the affects of the bailout: “Your TARP funds at work, on Wall Street“, CNN, 27 January 2009 — “Who said the big banks were out of the merger game?” Author William Cohan says the Pfizer deal shows that cash is king – and that they’ve got it.”

    This may mean that the banks will be looking for sure things for their bailout money. Consolidating the medical field could bring higher prices (layoffs and greater profits) at a time when the aging baby boomers will want more from the medical field.

    I have heard it said that the great depression was exacerbated by mergers and acquisitions, as well as large unions, which concentrated economic power.

    This is a rather long treatise on the subject, though not by an economist: “The Social Construction of the Great Depression: Industrial Policy during the 1930s in the United States“, Britain, and France”, Frank R. Dobbin, Theory and Society, Feb 1993.

    “For the United States, interest-group theorists argue that the New Deal was passed because the Democrats won the White House and had the opportunity to pass the kinds of legislation empowering unions and expanding social insurance that they had always backed; they ignore the fact the the New Deal industrial strategy of creating huge national cartels was antithetical to the Democrats’ traditional anti-big business, pro-antitrust stance.”

    Will the new president bother enforcing the anti-trust laws, or will mergers be seen as a sign of success?
    Fabius Maximus replies: Two parts to this.

    The first is probably wrong, as most of the government money to banks has been invested in Treasury and Agency securities, or deposited at the Fed to earn interest (see here and here). Unless the government steps in, I doubt we will see a wave of acquisitions outside the finance sector — except of near-bankrupt companies.

    The second is a well-known part of the New Deal: building concentrations of union and corporate power (including farm cartels). The Obama Administration seems likely to further this process, despite being inimical to our democracy. The Bush Administration financed a massive wave of mergers among financial institutions, and we can expect more of these during the next 4 years. Also, they are committed to expanding the reach of unions — even by extreme measures, such as eliminating the need for secret ballots by employees voting for unions.

  36. FM:”as most of the government money to banks has been invested in Treasury and Agency securities, or deposited at the Fed to earn interest”

    I read this also, that M0 is up due to banks storing all this cash in accounts at the Fed. As of right now, banks are walking on political eggshells for taking all this money and for likely needing more for TARP2. They won’t be in a political position to try anything bold, like buying up all the oil companies — even though this might be fun to watch.

    FM:”Also, they are committed to expanding the reach of unions — even by extreme measures, such as eliminating the need for secret ballots by employees voting for unions.”

    I’m not sure what private sector business is still standing that’s ripe for unionization these days, but I’m sure we’ll see more unionization of government sector employees. That’s been the trend for awhile. I’m seeing this already myself with city employees getting some forced time off due to reduce revenue, and the unions making noise about this. As we go to a more Europe-style economy, I can imagine us suffering from the same flash point — friction between elected governments and large public employee unions.
    Fabius Maximus replies: The success of union organizing might surprise people. Too many businesses have treated employees like walking kleenex. Union power waned during the long smooth economic growth since 1982 — and might wax during hard times. As for government employees, what fraction are not already in unions?

  37. FM:”As for government employees, what fraction are not already in unions?”

    Yeah, that’s a point. I’m not sure. I did a quick google and found this article here related to a proposition in 2005 that says 54% of California state employees are in unions. A substantial percentage but still room for growth looks like.

    For private sector, the mother of all union battles would be Walmart. Yesterday, though, I had Office Depot to myself. I see big empty stores filled with employees who look like they are just waiting to be laid off. There’s a lot of retail out there that’s just on the verge of collapsing, is my sense. If these guys go on strike, they’ll save the companies money for shutting down early.
    Fabius Maximus replies: Wow, that is a far smaller fraction that I expected.

  38. Rosenberg’s (next) post on being in a depression: $6 trillion in private sector debt must be eliminated … {We are} Still in the early stages of the credit contraction

    I believe we are in a depression, AND:
    1) that private sector debt must be reduced before there will be much private sector growth,
    2) gov’t directed stimulus programs will be slow to start, wasteful, with low or even negative returns on investment,
    3) that the massive mal-investment and mis-timed investments would be rationalized far more quickly if there were some economic growth sectors,
    4) gov’t is far more likely to invest in dinosaurs (GM, agro-farms) than in future, fast growing companies (fast growing because they’re mostly not being done now)
    5) gov’t programs will be more consumption oriented, like health care, than investment oriented, like new production companies.

    FM: “Tax cuts have a place in the mix, but they have a very low level of effectiveness. … Sad debate … already hashed out”

    I haven’t yet seen a study showing a historically better policy than tax cuts. Link?

    Yes, small tax cuts, alone, may not be enough.
    There is the claim that the $170 bil. tax rebates “didn’t work”. But that’s only 20% of what’s being discussed now. (a) It might well be that the tax rebates were enough to keep the economy going thru till the summer, and that without the rebate the crisis would have been sooner (mortgage crisis was end of 2006).
    (b) If it’s true that $6 tr in private debt has to be elliminated, using all of the 2008 rebate to pay down debt would only be a 3% first payment on the $6 tr.

    Cathryn: Yeah, well, tax cuts don’t quite fit into the current narrative. Actually, Obama campaigned on giving 95% of the people a tax cut. It’s possible the Reps will be calling ever louder for tax cuts. It’s the Dem elites and the anti-capitalists who hate tax cuts. But far more than tax cuts is the Bush spending which helped create the financial mess — and you don’t hear much negative by the big spending Dems about too much Bush spending.

    PQ = MV, there’s the velocity of money in the equation. There’s been a huge evaporation of both money and velocity, but the Quantity in inventory is still high. So prices are dropping, and demand is dropping, and employment is dropping … and all will keep going down until bottom. When MV is enough, at that Price, to allow companies to hire/ invest towards producing more Q. Probably before $6 tr in debt is reduced, but maybe waiting for $2 or $3 tr. Nobody knows when.
    Fabius Maximus replies: The relative efffectiveness of various forms of short-term stimulus is a well-established aspect of the economics literature, based on a strong foundation of both theory and empirical data. For more on this see “Everything you need to know about government stimulus programs (read this – it’s about your money)

    Note: at 425 words this is over the 250 limit. No action needed, but please keep comments brief.

  39. Tom Grey:”There’s been a huge evaporation of both money and velocity, but the Quantity in inventory is still high.”

    There’s been a collapse in wealth, or in the value of stuff. TARP and the Fed came in and spiked up the supply of cash, M0, so the supply of cash is higher than ever, but all that cash is sitting dead at the banks because they still have vast bad assets to cover. Here’s where the zero velocity money is all sitting.

    All the US borrowing is sucking the oxygen out of world economy because at ~0% interest, money rushes to the least screwed currency. That’s why those German bonds failed to sell and that’s why the Yen is going up, because the Japanese situation is slightly less bad. Even the UK is teetering — if sovereigns start going broke, I don’t know what happens.

    Tom Grey:”Actually, Obama campaigned on giving 95% of the people a tax cut. It’s possible the Reps will be calling ever louder for tax cuts. It’s the Dem elites and the anti-capitalists who hate tax cuts.”

    The US stimulus package, will dribble out a few hundred dollars in tax reduction to families which will just get spent on groceries. In a collapsing economy people try to save, but they don’t succeed in actually saving.

    Reality is finally setting in as far as the quantity and speed that fiscal stimulus can occur at. The some-odd hundred billion of stimulus will dribble out by 2010 or so as the projects creep through legal obstacles. Too little to do much more than offset other job losses, to late to help in the short term.

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