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The Third Depression?
Jim
Randle reports, G20
Leaders Pledge to Cut Government Deficits:
Leaders
from the world's 20 most important economies set targets to slash
government deficits, haggled over tougher financial regulations and
compromised on a proposal to tax banks. The G20 meeting wrapped up
Sunday in Toronto.G20 leaders say the global economic recovery
is fragile and faces serious challenges, including growing government
deficits.The Greek crisis showed how large deficits can make
lenders worry that they will not be repaid, and keep them from making
the new loans, stalling the economy.Canadian Prime Minister Stephen Harper urged his colleagues in
advanced nations to cut their deficits in half in three years, but also
urged them to make cuts with caution."Here is the tight
rope that we must walk," he said. "To sustain recovery it is
imperative that we follow through on existing stimulus plans those to
which we committed ourselves last year but at the same time advanced
countries must send a clear message that as our stimulus plans expire
we will focus on getting our fiscal houses in order."Mr. Harper's point is that cutting deficits
too little or too slowly hurts investor confidence. But if nations
make the cuts too deeply or too quickly, they risk losing the potential
economic stimulus generated by government spending, something that
critics say could push the global economy back into recession.The
G20's final communiqué, hammered out by leaders behind closed doors,
also offers a compromise on a proposal for a new tax on banks.
Some
economists are worried about the push to slash deficits too early. In
his op-ed piece in the NYT, Paul Krugman goes as far as calling for The
Third Depression:
Recessions are common;
depressions are rare. As far as I can tell, there were only two eras in
economic history that were widely described as “depressions” at the
time: the years of deflation and instability that followed the Panic of
1873 and the years of mass unemployment that followed the financial
crisis of 1929-31.
Neither the Long Depression of the 19th
century nor the Great Depression of the 20th was an era of nonstop
decline — on the contrary, both included periods when the economy
grew. But these episodes of improvement were never enough to undo the
damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early
stages of a third depression. It will probably look more like the Long
Depression than the much more severe Great Depression. But the cost —
to the world economy and, above all, to the millions of lives blighted
by the absence of jobs — will nonetheless be immense.
And this third depression will be
primarily a failure of policy. Around the world — most recently at
last weekend’s deeply discouraging G-20 meeting — governments are
obsessing about inflation when the real threat is deflation, preaching
the need for belt-tightening when the real problem is inadequate
spending.
In 2008 and 2009, it seemed as if we might
have learned from history. Unlike their predecessors, who raised
interest rates in the face of financial crisis, the current leaders of
the Federal Reserve and the European Central Bank slashed rates and
moved to support credit markets. Unlike governments of the past, which
tried to balance budgets in the face of a plunging economy, today’s
governments allowed deficits to rise. And better policies helped the
world avoid complete collapse: the recession brought on by the
financial crisis arguably ended last summer.
But future
historians will tell us that this wasn’t the end of the third
depression, just as the business upturn that began in 1933 wasn’t the
end of the Great Depression. After all, unemployment — especially
long-term unemployment — remains at levels that would have been
considered catastrophic not long ago, and shows no sign of coming down
rapidly. And both the United States and Europe are well on their way
toward Japan-style deflationary traps.
In the face of this grim picture, you might
have expected policy makers to realize that they haven’t yet done
enough to promote recovery. But no: over the last few months there has
been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the
old-time religion is most evident in Europe, where officials seem to be
getting their talking points from the collected speeches of Herbert
Hoover, up to and including the claim that raising taxes and cutting
spending will actually expand the economy, by improving business
confidence. As a practical matter, however, America isn’t doing much
better. The Fed seems aware of the deflationary risks — but what it
proposes to do about these risks is, well, nothing. The Obama
administration understands the dangers of premature fiscal austerity —
but because Republicans and conservative Democrats in Congress won’t
authorize additional aid to state governments, that austerity is coming
anyway, in the form of budget cuts at the state and local levels.
Why the wrong turn in policy? The hard-liners often invoke the
troubles facing Greece and other nations around the edges of Europe to
justify their actions. And it’s true that bond investors have turned on
governments with intractable deficits. But there is no evidence that
short-run fiscal austerity in the face of a depressed economy reassures
investors. On the contrary: Greece has agreed to harsh austerity, only
to find its risk spreads growing ever wider; Ireland has imposed savage
cuts in public spending, only to be treated by the markets as a worse
risk than Spain, which has been far more reluctant to take the
hard-liners’ medicine.
It’s
almost as if the financial markets understand what policy makers
seemingly don’t: that while long-term fiscal responsibility is
important, slashing spending in the midst of a depression, which deepens
that depression and paves the way for deflation, is actually
self-defeating.
So I don’t think this is really about
Greece, or indeed about any realistic appreciation of the tradeoffs
between deficits and jobs. It is, instead, the victory of an orthodoxy
that has little to do with rational analysis, whose main tenet is that
imposing suffering on other people is how you show leadership in tough
times.
And who will pay the price for this triumph of
orthodoxy? The answer is, tens of millions of unemployed workers, many
of whom will go jobless for years, and some of whom will never work
again.
I also fear that policymakers are making a
major mistake by moving so aggressively to cut deficits at a time when
the global economy remains fragile. If you go back in history and look
at all the major recessions, they were preceded by major policy
mistakes. Either the Fed started raising rates too aggressively, or
governments slashed spending too aggressively, or both.
I listen to nonsense from some
commentators claiming that if the US is not careful, it will suffer
the same fate of Greece. Total rubbish. The US economy has as much in
common with Greece's economy as Canada's economy has with Romania's
economy. All those who claim "it's time to face reality" and cut
spending "or face the grim reality that Greece is facing" should be
careful for what they wish for. Their myopic focus on austerity could
choke off any consumer demand perking up at this critical juncture.
And while
some commentators fear a double-dip recession or that the "Great
Recession" never ended, I see hopeful signs of recovery. Stéfane
Marion, Chief Economist at the National Bank of Canada had this to say
about today's US consumer spending figures:
A large amount of
economic data will be published this week to help validate/invalidate
the robust earnings growth expectations for Q2 – the bottom-up consensus
is currently calling for a rise of 27% on a year-over-year basis. In
our opinion, we need nominal GDP growth of at least 4% for current
profit assumptions to be realized.After last week’s dismal housing data, it is clear that
residential investment will not be a vector of growth this quarter.
Fortunately, business investment and inventory rebuilding will more than
offset this weakness. However, to get 4% nominal GDP, the consumer
sector cannot retrench. Data released on Monday morning are
constructive. Consumer spending grew 0.2% in nominal terms in May.This
outcome was all the more impressive in that it occurred despite a 1.6%
decline in spending on energy goods. In fact, if we exclude spending
on all the non-discretionary items (housing, gasoline, groceries and
health), personal consumption expenditures were up a robust 0.4% on the
month. As today’s Hot Chart shows (see chart above), spending on
discretionary goods and services is actually set to accelerate to a 6%
annual clip in Q2. This performance,
the best in three years, is not suggestive of disarray in consumer
spending patterns.
While I see signs
of recovery, I also worry that policy blunders and this myopic focus on
austerity to assuage bond vigilantes will kill any recovery going on
right now. Below, please watch Chris Haye's interview with Dean Baker,
one of the few economists who correctly predicted the US housing
meltdown. Listen carefully to Mr. Baker's comments because he's
absolutely right on so many of the key points he raises.
»
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Just as all the doom and gloom posts and goled to 50000 posts are driving traffic for the advertisers on the site, like Goldline.
There's nothing wrong with catering to an audience, but it is what it is.
I love your stuff man. Heard your shit on XM Raw Dog Comedy 150 couple years back right between Carlin and Hicks.
Classic!
please watch Chris Haye's interview with Dean Baker, one of the few economists who correctly predicted the US housing meltdown.
Hell's bells, I was telling my cousin in LA about the coming meltdown 2 years before it happened, and I am not an economist. Of course his wife left him and he bought her out at the peak, now he pays for that, and she bought in Pheonix with the cash and is down 100K.
Anybody with half a brain could see it coming.
Yup. I was telling people to rent and not buy a home back in late 2005. When should I upload my video?
You lend to the government Leo?
The Obama administration understands the dangers of premature fiscal austerity [now there's a fucking understatement] — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
Let's set aside the Federal Government and it's attempts at Keynesian stimulus for a moment. Who in their right mind believes that pretty much every state/muni government isn't simply puss-filled to bursting with make-work, red-tape, useless, rent-seeking, crony-friendly, benefit larded, soul destroying waste?
Yet somehow keeping that ball rolling a bit longer just as it's about to collapse under it's own weight is going to lead us to the sunny uplands of economic prosperity?
Heavens to Betsy Leo that's a tough one to swallow. Are you sure that last white-paper you read wasn't titled Animal Farm?
Go ahead everybody, take your unemployed ass down to town hall today and vote for that prop 2 1/2 override so Springfield doesn't have to fire any $120k diversty coordinators. You'll thank me later! - Oh and when things are boomin' again that's when Springfield will really tighten it's belt! Promise!
Woooo-ha-ha-ha-ha!
Hard to argue on behalf of the "puss-filled" but what are you proposing?
How do you keep anything functioning when all you are paying is pensions and senior employees that haven't left to work a graft job?
Who will be your bankruptcy judge in charge of burning government pensions and labor contracts?
And if you find the policy and judgment instead of just whining, who will trust you to enforce this abrogation?
Well it's going to blow up eventually, it's just not sustainable. The fact that there are only painful and ugly options doesn't change that. But just converting muni obligations into Fed obligations doesn't solve anything. At best those obligations will be "paid" with funny money.
People in the private sector get screwed all the time. There is not/will not be unlimited political tolerance for shielding public sector employees from economic disaster.
"Well it's going to blow up eventually, it's just not sustainable."
BINGO! It's as simple as that boys and girls. Leoism falls flat on its butt when trying to explain how the system that relies on endless growth can continue on a finite planet. That's the reality that people behind the curtain don't want us to find out lest they be brought down from their towers.
Well, government that's growing faster than that which supports it anyway. I can't claim to know the absolute limits of technology, innovation and planetary resources.
Any Solutions or actual thoughts? All this "it's unsustainable" stuff is only relevant once it in fact becomes UNSUSTAINABLE. So far that hasn't happened. Of course we know money printing only changes liquidity and labor metrics--this is ZH not MurdochWatch.
Also, there has been nothing but boundless growth in tech and resources in the last decades, so why the collapse? Not just a collapse but very real death and starvation, even in the US working poor. It's been nothing short of rape-and-pillage economic policy by the oligarchy and their dominated, bogus nouveau-aristocracy.
Oh and to explain the failed solution, I'll quote Chapelle's "black Bush" "Talkin about Mars Bitches!!!"
Amen. And that guy Baker spouts the same line that Stiglitz did to Hendry. The U.S. can do anything it wants to do because it can print money.
You can always win an argument when you can call for a causality free course of action.
Let's see, if things get worse it will because we did not stimulate enough, and if things improve we will hear how stimulus works!
Exactly. This is the same reasoning espoused by Realtors, "It's a good time to buy! Buy all the house you can afford!", no matter what the conditions of local or global economies or housing trends. Also reminds me of the kind of nonsense Abby Joseph Cohen might say.
Leo, I'm sorry man, it's just too late to get into it.
YOU ARE FUCKING CLUELESS.
What a waste of time even bringing up your keynesian posts any more. Get a fucking life.
You can post all the pictures and middle fingers you want, Leo. That doesn't make the shit you continue to post any more credible.
Get off you fucking ass and smell the roses. The game for keynesian fools like you is OVER. It's just that you are too dumb to see it yet.
Agreed.
Leo, I thought you were dying?
Well, get on with it already!
(For those who think this is cruel, the joke is that there is no "Leo" at all! He is as fictional and artificial as Max Headroom or the Easter Bunny.)
Wa-wa-wa-wait.
There-there-there's no Ma-ma-ma-Maxheadroom-room?
I'm starting to believe that. Nobody real is this willfully obtuse...are they?
The last thing I would have expected is someone at ZH is someone drinking Krugman's Kool-Aid. If his recommended methods of "stimulus' is so efficacious, then why is the unemployment rate still at 20% after $787 billion from Congress and at least $1.25 trillion from the FED? I look at the chart of consumer spending that you published at the top of the article and to me, all the arrows point down! And the best that Krugman can say, like any other bankrupt debtor and the purveyor of any other bankrupt ideology is "if we only had a little more time and a little more money!"
You quote the most meaningless document possible-a communique from 20 guys who can't agree on when to go to the bathroom as a basis for making policy! The president of these United States claims with a straight face that he agreed to cut our deficit in half by 2013 and you bought it! GMAFB!
Let's go with some questions:
Does anyone even attempt to assert that Krugman got anything close to his stimulus? The reason for this lack is also practical, since we entered the Great $uck with a giant bubble AND deficit, making any real Keynesian stimulus impossible.
Firing most of the cops, teachers and sewage treatment people would have rebalanced the 20% UE?
And for the real point of the G20:
Who has the most muscle to avoid/enforce the deficit-cut pact as needed?
Picture this, you're on an island and don't have fossil fuels, and there are no ships coming to your island. You and, let's say, 100 other people are the only inhabitants. Would you all become cops, teachers and "sanitation" engineers? Would that _really_ "solve" the unemployment "problem?"
Because the stimulus went into the pockets of unions and gay dwarven eskimos instead of the people of the US, and the Fed balance sheet money is in Goldman Sach's account?
In other words, nobody that matters in the economy got any money out of that 2 trillion.
Is that some kind of euphemism for oral?
1000% Mitchman,
"The last thing I would have expected is someone at ZH is someone drinking Krugman's Kool-Aid"
and along comes Leo..... hook, line, and sinker. He is buying it, drinking it, bathing in it and for the kicker he is allowed to blather it for all to see here on ZH. WTF?!
At this point half of what Leo writes reads like parody. Let's be charitable and assume that this is intentional parody, played with a straight face.
If you go back in history and look at all the major recessions, they were preceded by major policy mistakes. Either the Fed started raising rates too aggressively, or governments slashed spending too aggressively, or both.
Actually, they were all preceded by massive credit expansion which created malinvestment.
Show me some pictures of sexy babes, please. Me so horny.
correct zeno, raising rates or slashed spending had nothing to do with either of the the previous 2 depressions. It was credit deflation after a multi generational credit fulled bubble across all asset classes that caused the depressions.
nothing can prevent the credit deflation, its a cycle, and when its run its course the cycle turns. these half ass attempts to prevent the inevitable are only going to make it worse and prolong the pain. Unfortunatlely we are just better off realising the shit we are in and dealing with its consequences so we can all move on. At least that way some of us have a chance of seeing another genuine bull market instead of these bear market ralllies. What people need to ask is do they want to see the first bull market in 5, 10 or 15 years from now. Id rather see it in 5.
Look up at those beautiful green shoes!
leo smoked all the green shoots and when he got hungry all he was left with was this...
http://www.unixslave.com/images/nothingburger.png
There's nothing to worry about, if you think the US deficit is a good thing. The chance that the US will cut it's deficit by 750 billion dollars a year by 2013 is about zero to 64 bits of machine precision. This administration and Congress have done irreparable damage to us, our kids, and our grandkids. The deficit is now structural at a level that beggars imagination. I used to complain loudly about W's deficit. But he was a rank amateur at spending money we don't have.
This is the typical dangerous nonsense. Now that we're stuck with the W deficit and the carry-overs it would be a disaster to allow this austerity-deflation conspiracy to run amok. Since you are clearly gunning for partisan blame, I also must remind you that much of the current debt AND budget deficit is solely the result of the Bush era. This includes carry over policies, such as tax handouts, phrma handouts and wars, as well as the notable deregulation tragedies in energy and finance.
The point is, the disasters, debt and deficit were 'baked in' from the start. It's just a question of deflationary squeeze into the hands of those that are holding the "bubblebucks" or a balanced policy according to fair political solutions. Naturally it seems that most of the oppressive looters on here favor their scheme of austerity and the destruction of the economy, the last of free government, and probably America herself. You cannot have your cake and eat it too.
Don't you frikin get it? Your grandkids ain't gonna pay for dead men's crimes and paper frauds. These ideas are destroying the country by deflationary implosion and eventual default. It's just a selfish quest to maintain a parasitic nouveau-aristocracy that's about as legit as tulip futures.
Stimulus and QE are the best of the worst options after the W gang killed the American dreams. Otherwise it's just default, slavery, and blood-in-the-streets hellscape for the grandkids.
Maybe I'm venting too much on Breaker, but Here Here for Leo K!
Dude, wake up!
THE baked-in reality was the grow-or-die economy. You need to read GW (George Washington) on this site, he's the only one that's coming from a position of true fundamentals (isn't espousing some sort of political claptrap).
It's like this, you get hurt from the rightwingers throwing rocks at you and then when there's a rock slide you blame it on the rightwingers. You associate rocks with pain, with the pain from the rightwingers, therefore any rocks, such as the rockslide barreling down on your ass is automatically blamed on the rightwingers; and, instead of getting out of the way you're going to stand there and demand that the rightwingers quit throwing rocks!
It's fucking like this, if you're mad you have only two things to blame:
1) Yourself for swallowing all the shit;
2) Mother Nature for creating the limited environment that's puking at all of us.
Oh, and btw - The US isn't " the last of free government."
OK i'm awake, chill man. GW is talented. Nonetheless, this is the preeminent politics of the day, and claptrap begets claptrap.
If you can explain the true sytemic logic of "...wingers" you will be the genius of ZH!
so:
1) Who swallows this shit? I sure didn't. Even Cheney isn't a true believer... F|ck, even the GE ceo guy and Petrus keel over...
2)You mean reality of life?
Sure knock it, but where is there a more "free gov't?" Pain is the game.
Did it all start with Bush II? What about Clinton, Bush I, Carter, Nixon? How about L. B. Johnson and his damage to the poor with his huge welfare experiment that never ended, just got bigger?
We have been on this course a long time. The degradation did not start with the previous administration. That would be too easy to fix.
Face it, the rot permeates the whole system. Both parties suck.
Yeah they're all assholes-- that's tough to argue with. But there is a difference between veering out of your lane and a flaming fatality.
In some sense we have "been on this course a long time." On the other hand, if you look at the numbers: top tax rates, deficits, middle class income distributions, etc. etc. you can see that in truth, we have not. The return to sanity will be tough, but not some disastrous path to USSR.
while the current administration's response to the banking crisis has been tragically japanese rather than responsibly nordic, as it were, it is fairly crucial to distinguish between running deficits in expansions (reagan, bush1, most of bush2, greek socialists) and running them in deflationary depressions (very last of bush2 and obama). this is not just a quibble; it is an utterly important difference.
the unfunded liabilities of pensions, medicare, social security, apparently an eternal state of war, etc. are the wildly irresponsible backdrop and lead in to the current attempt to counter this unfolding depression. attempts at austerity now will be largely in vain as they reduce economic activity and tax revenues more than costs are cut.
our current dilemma is the logical and pernicious outcome of grover norquist's recommendation to run deficits under republican presidencies so as to hamstring dems should they get into power. both parties were guilty of short sighted maximizing of short run opportunity at hideous destruction of long term prospects, very similar to the bank bailout vs. bank restructuring or the original securitization of toxic debt for short term profit vs. sounder lending policies for long term solvency.
+1000 Jeff... you hit upon the major points with precision... well done.
We risk depression for a variety of reasons, stemming primarily from poor fiscal, monetary, and regulatory decisions (or lack thereof) made in the past. Letting the housing bubble go unchecked though abnormally low interest rates and overlooking rampant and massive fraud in the housing sector was just the start of some very myopic decisions that delayed the inevitable. Freddie and Frannie remain massive black holes-- and FHFA isn't far behind.
Allowing stimulus spending on the fiscal ledger would have been ok... but it wasn't well thought out in 2008 (thx Hank)... and it still isn't today. Monetary policy (which overwhelmed fiscal policy) helped the banks... and nary anyone else.
And now what? We are left with even higher deficits and subsidizing monetary policies. And where has it gotten us? As Leo's chart illustrates, we seem to be cutting non-discretionary spending (mortgage payments) for discretionary items (iPads). Now THERE's a formula for long term finanical success... NOT!
Still, going cold turkey on fiscal and monetary policy probably isn't the optimal answer, and could accelerate the deflationary lack hole. But fiscal spending is clearly out of control and is being consumed by growing structural liabilites that cannot be paid in full. The math simply does not work.
Like it or not, if deficits are not contained and the Fed decides on another round of ineffective QE, the bond vigilantes will be out. Once that happens, you can kiss our ability of servicing any new Treasury debt goodbye. At best, they will be rolling trillions every month or so.
Obama would LOVE for the Europeans and others in the G-20 to step up their consumer spending efforts. Sorry to say, they are not going down that road. We don't have to like it, and our options are running short.
Our so-called leaders have spent so-much time on selling out our future on the short term, they haven't had the time-- or the inclination-- to comptemplate the consequences.
Hey, now... guess who's comming for dinner real soon? It would be the Financial Grim Reaper. Tell him I said "hello", Leo.
Now, to make Leo and his neo-classical friends happy, they have someone they can trust to drive the car off of the cliff. Once Ben announces the panic-induced QE 2.0 package for the continued benefit of his bankster friends, all in the world of unprofitable Chinese solars will be nothing but shades... for about a year.
Interestingly enough, we may hit S&P at 600 before Ben can pull the trigger after the midterm elections. And no, it won't help at all in the long run. We have already crossed that debt rubicon, and the only issues are massive defaults and/or currency collapse. If we're lucky (not), we'll get both.
As someone said above, it's either a whole heaping full of deflationary depression pain now (2-3 years of fear and hunger), or a rolling depression over the next 10-15 years.
Those who hold fast to neo-classical Keynesian alchemy are doomed to understand the inevitable-- simply because is DEBT is the ULTIMATE PROBLEM-- not the ultimate SOLUTION.
"spending on discretionary goods and services is actually set to accelerate to a 6% annual clip in Q2. This performance, the best in three years, is not suggestive of disarray in consumer spending patterns.
"
Imagine the consumer spending we'd have if everyone could stop paying their mortgages!
I keep hearing that it's the consumers fault. We're being stubborn and not spending like we should. Well, it sure seems like real wage increases would help that. It would be nice if it even kept up with inflation.
Also, I'm for not paying your mortgage. Sure it's a legal contract to repay the debt and all. However, the agreement was made under the impression that Banks/Government (and everyone else who has a hand in this debacle) would not collude to decimate the economy through ass-brained financial products and endless bailouts, inexorably leaving the home buyer with no job and no prospects for paying that debt, just a savings account that declines in value every day (if s/he is lucky). So, deal off, motherf#$%&rs... that's my advice anyway.
How do I junk the original post here?
Amen to that. This is the worst post I have ever read on ZH. Tyler, please remove this post, and ban the moron who wrote it.
Leo is no different than the countless other analysts who begin to realize they were wrong. It's excuse time, and He's setting this up to be someone's fault. That way, he was right all along. Until he was wrong. But that was only because of someone else's blunders, destroying an otherwise traction gaining recovery.
Leo's intentions are good.
Unfortunately, there's this curious thing about the "road to Hell"...
maybe give it a one-star. i don't know how to give it zero stars.
negative stars. Black holes.
First seen at the 2010 Masters Tournament:
Nike Markets New Green Shoes
NEW GREEN NIKE’S
Who says golf isn't exciting?
Dude, you got balls and you are a classy guy.
Also, you are completely wrong about everything
Agree. It's all the fault of the little people who keep saying
"Emperor? No clothes!"
None of it is the fault of the elites who are using every last
penny of our net worth to spend their way out of debt.