The Third Depression?

Via Pension Pulse.

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.

Comments

[dnarby]

Yet Another Keynesian Clown Steps Up to the Plate: Leo Kolivakis at Pension Pulse

http://globaleconomicanalysis.blogspot.com/2010/06/yet-another-keynesian...

I'm genuinely sorry Leo.

I am beginning to suspect that due to your condition and the way you make your living, that contemplating the coming changes frightens you, causing you to worry about being gainfully employed in a post-Wall St. Bankster world.

Relax - You have a good mind.  You learn quickly.  You just learned a system that's going to become obsolete, as all systems do.  You can learn new systems, and likely faster than most.  If you just look around, you'll see where you can fit in and be gainfully employed in the world to come.

Doubtless some ZH posters will feel the need to deride this statement.  Please stop it.  You're part of the problem.  If you keep him and others like him afraid, they will simply hang on until the system collapses.  That does no one any good.

[Leo Kolivakis]

My condition? I have Multiple Sclerosis and thank God I am productive enough to still contribute intelligently to mindless debates. Spare me with your dumb comments. Go towards the end of the comment section and read the five points I just outlined. Mish is venting. Let him vent at my expense. Shows how much class he has.