"The Only Way Out Is Creative Destruction" Sinn Fears "Self-Inflicted Malaise"

Tyler Durden's picture

Authored by Hans-Werner Sinn, originally posted at Project Syndicate,

Almost exactly eight years ago, the Lehman Brothers collapse plunged the global economy into recession. The interbank market collapsed, and the entire industrialized world was thrown into the worst crisis since the end of World War II. Though central banks have maintained ultra-low interest rates, the crisis hasn’t yet been fully overcome. On the contrary, numerous economies, such as the southern European countries and France, simply aren’t making any headway. And Japan has been on the ropes for a quarter-century.

Some economists believe that this is evidence of “secular stagnation,” a phenomenon described in 1938 by the American economist Alvin Hansen, who drew on Karl Marx’s Law of the Tendency of the Rate of Profit to Fall. Owing to the gradual exhaustion of profitable investment projects, according to this view, the natural real interest rate has continued to fall. Stabilizing the economy thus is possible only by an equivalent decline in policy interest rates.

In view of the huge credit bubble that preceded the crisis in Japan, the United States, and southern Europe, and the aggressive policies pursued by central banks over the last few years, I doubt that this theory is correct. In fact, I find it plausible that a very different mechanism lies behind the post-2008 stagnation, which I refer to as “self-inflicted malaise.”

This hypothesis is best understood in the context of the economist Joseph Schumpeter’s theory of the business cycle. Faulty expectations on the part of market participants regularly cause credit and asset-price bubbles. Investors, expecting prices and incomes to rise, purchase residential and commercial properties, and they take chances on new business ventures. Real-estate prices start to rise, a construction boom occurs, and a new phase of rapid expansion begins, partly sustained by the revitalization of the domestic economy, including services. The growth in incomes increasingly emboldens borrowers, which further heats things up.

Then the bubble bursts. Investment collapses and real-estate prices fall; businesses and banks go bankrupt; factories and residential buildings are vacated; and employees are laid off. Once prices and wages have fallen, new investors step in with new business ideas and establish new firms. After this “creative destruction,” a new phase of rapid expansion sets in.

In the current crisis, however, monetary policy preempted the creative destruction that could have formed the basis for a new upswing in growth. Asset holders talked central bankers into believing that Schumpeter’s economic cycle could be overcome by large-scale bond purchases financed via the printing press, and by corresponding interest-rate reductions.

To be sure, these measures stopped the fall in asset prices halfway and thus saved much wealth. But they also prevented sufficient numbers of young entrepreneurs and investors from risking a new start. Instead, established firms remained in place, keeping themselves afloat but lacking the wherewithal for new investments. In Japan and Europe, in particular, large numbers of such zombie firms and banks survived, and they are now blocking would-be competitors able to drive the next upswing in growth. The resulting economic ossification looks like the secular stagnation that Hansen described; in fact, the malaise is self-inflicted.

And, because low interest rates have reduced asset managers’ returns, some central banks – and the European Central Bank, in particular – have relied on successive interest-rate cuts in an effort to engineer ersatz value gains for assets. The economy is thus caught in a trap, forcing the ECB to engage in ever more radical monetary-policy measures. Its current program of quantitative easing is meant to double the money supply in a very short period. Further guns are being moved into position, such as successively more negative nominal interest rates or so-called helicopter money.

The only way out of the trap is a hefty dose of creative destruction, which in Europe would have to be accompanied by debt relief and exits from the eurozone, with subsequent currency devaluations. The shock would be painful for the incumbent wealth owners, but, after a rapid decline in the dollar values of asset prices, including land and real estate, new businesses and investment projects would soon have room to grow, and new jobs would be created. The natural return on investment would again be high, meaning that the economy could expand once again at normal interest rates. The sooner this purge is allowed to take place, the milder it will be, and the sooner Europeans and others will be able to breathe easy again.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
s2man's picture

well,  first,  my first first.  Not that that has ever been my goal... 

i am not even going to comment,  due to my ecstatic mind frame.  

CrazyCooter's picture

Bullshit, the house is fixin' to burn down.

EDIT: This has NOTHING to do with returns - there are none - there isn't a productive use of capital in the current paradigm. And there in lies the problem.

Regards,

Cooter

J S Bach's picture

"The shock would be painful for the incumbent wealth owners, but, after a rapid decline in the dollar values of asset prices, including land and real estate, new businesses and investment projects would soon have room to grow, and new jobs would be created."

Yes.  And then the whole f***ing cycle can begin anew with the same swindlers reaping yet another vast harvest of wealth from the imbecilic sheeple.  My God... how many times have I posted the same statement... THE MONETARY SYSTEM ITSELF IS WHAT HAS TO BE COMPLETELY DISMANTLED AND REPLACED WITH DEBT-FREE CURRENCY!!!  If we had honest money, there would never BE any of these accursed "resets" and "business cycles".  It's all a scam where the money powers manipulate and steal from the system through rapacious usury.  I tire from repeating this over and over and over.

Manthong's picture

Schumpeter was cool,

But it seems to me that complete obliteration is a bit more in order.

HedgeJunkie's picture

Congrats, however the norm is to declare "First, bitches!!"

So your not Zero Hedge legit.

Creative_Destruct's picture

"In the current crisis, however, monetary policy preempted the creative destruction that could have formed the basis for a new upswing in growth."

UHHHH... YUP!  (Notice the Aliase & Avatar) - Joey S. had a good observation, back in the day.

Kirk2NCC1701's picture

Trump NAILED it, when he said that the FED and therefore the Markets are catering 100% to Obama, to delay the Reset until after the election.

Traitors and crooks every one of them.  Get out the pitchforks and rope!  Short Banksters.

Sandmann's picture

So why doesn't Trump say he will replace the Board of Governors at The Fed ?

dmger14's picture

Because he wants to survive at least until the election.

root superuser's picture

It will never be back to normal. They have decided to deindustrialize the world starting with 1st world countries and its never going to be the same again. At same time they will wont change economic policies (continue to lower economic output) because nothing will wake people up until we live in prosperity and abundance. Only once we have NWO order will be restored. NWO policies will be of fixed population and economy output. Small increase of economy will be allowed through inovations. There shall be no more growth based on unsustainable stripping of non-renewable resources.

Sandmann's picture

The stagnant US economy was revived by the IBM Anti-Trust Case, the breakup of AT&T, the breakup of the Airlines Cartel. The whole dynamic of IBM having a skunkworks to make an open-architecture PC and the spinoff it created for Samsung, Gates & Allen, Seagate, Lotus, Wordpro, and the huge growth in new airlines like Southwest, Continental, and the dynamic of Sprint and the effects of Deregulation.

All that has happened is new Cartels - massive concentration with GE swallowing RCA, Boeing swallowing Lockheed, Kraft etc simply becoming bloated global monoliths. COMPETITION has been replaced by "White House Protected" for Google, Facebook, Microsoft, Apple.......

It is a world of Cartels just as Karl Marx predicted. 

MalteseFalcon's picture

We have the laws and historic precedence for dealing with monopolists.

All we need is the will.

amanfromMars's picture

Dump the austere landscapes and warrior actions and present heavenly projects with bottomless pit benefaction/zero cost pricing.

Keep things simple and use novel intelligence to create an alien world for new smarter humans/virtual machine habitation.

Anything less is rapidly going to see a global witch hunt by all manner of weird and wonderful means/anonymous and deadly agents to permanently rid corrupt systems of their heads and leading head personnel. Further ruling and reigning remotely from the shadows for relative immunity and practical impunity of virtual action is no longer a free safe haven space place. It is a mass killing field.

And the system knows that it is now so, and terrifies you in response to it being terrified of the consequences of its previously thought secret and never to be uncovered actions being widely understood and violently corrected if systems choose to remain deaf, dumb and blind to New Orderly World Order Programming and Advanced Internetworking Virtual Reality Projects/Greater IntelAIgent Games Plays? 

Yes, ..... it certainly is. I wonder what path they will choose?

css1971's picture

"The sooner this purge is allowed to take place, the milder it will be"

 

Bit fucking late. Mate.

 

The bubble is 40 years and climbing. it's going to be like having your legs ripped off by a wood chipper. That's how mild it's going to be.

cognitive dissident's picture

My main income in college was playing pool for $. 9 ball was THE game, and once I had somebody in the hole for say, $100 or so, my opponent would invariably ask for a race (to 5 games or more) for "double or nothing... I usually acquiesced, but told them they get ONE LAST CHANCE.

Oh my, how different things are in this "new normal" world of criminal finance/scheming/theft...

mendigo's picture

Speaking of old guys who said some stuff -

Its like the man said in his book, The Creature from Jekyl Island:

The name of the game is Bail-Out.

Still..one would think they would be more subtle about it.

Book is available for free download btw, if youre into that sort of thing

AE911Truth's picture

Creatively destroy Petroleum energy infrastructure by replacing it with an energy source with a much higher E.R.O.E.I. such as Stanley Meyer or similar technology.

 

Creatively destroy debt based currency with debt free money.

Rebel yell's picture

That is so true! If we had done in 2008, what we had done in 1987, this would be well behind us and we would be in a real economic growth cycle. Instead, we have obese corporations on life support using all of the electricity that the emergency generator can produce,

CRM114's picture

For this to end sooner, and therefore less painfully, politicians and experts in power will have to admit they were completely wrong.

 

Never. Going. To. Happen.

 

 

Hasn't happened in the whole of human history, and it won't happen now.

Rebel yell's picture

Yes it did. Nixon admitted that he was wrong:
"I was wrong in not acting more decisively and more forthrightly in dealing with Watergate, particularly when it reached the stage of judicial proceedings and grew from a political scandal into a national tragedy. No words can describe the depth of my regret and pain at the anguish my mistakes over Watergate have caused the nation and the presidency, a nation I so deeply love, and an institution I so greatly respect.[222][223]"
Richard M. Nixon

Iconoclast421's picture

It is only a malaise for the 99%. But for what do they matter?

sam site's picture

You say, "Faulty expectations on the part of market participants regularly cause credit and asset-price bubbles".  What about the role of bankers creating free money through fractional reserve banking that fuels these bubbles?

You act like bubbles are a human nature problem like an addicted gambler always returning to the casino.  They start with the lure of free fiat money offered by criminal bankers.

shovelhead's picture

Ohhh, all the drama.

Paper returns to...paper in value while real assets get repriced. Viable producers will have access to funds because they have real profits to make. Marginal businesses will go bankrupt, as they should, and new smaller, leaner businesses will emerge to take their place. There will be some disruptions as bankruptcies slow goods being available due to ownership issues but those goods will be sold off because they have a utility.

Repricing may not be pretty but it will occur almost instantaneously when paper promises to pay evaporate back to the thin air from whence they came. That new BMW will sit on the showroom floor as the window sticker changes lower daily, but prices for alternators and starters for older cars may increase as demand for them goes higher.

This is what happens when Main St. once again determines the value of 'money' in whatever form it takes, be it doubloons, guilders, sterling or dollars.

And Quaker Oats will still be selling Quaker Oats although they may drop making those silly overpriced granola bars.

 

MASTER OF UNIVERSE's picture

I engineered complete destruction of the Global Banking Sector, and _NOTHING_ can stop it, Sinn. Moreover, attempting to propagandize a solution via 'creative destruction' will only speed up the process of absolute destruction of every bank in the entire world. Bottom line is that I don't need any help from the incompetent so-called Macro 'Economists' because when I engineer something it is always built to last, and it is always indestructible because I don't like re-doing things that should have been done correctly to begin with. Economists build rickety unstable structures that can be levelled by the right engineers, and it just so happens that Goldman Sachs Engineers are nowhere near the intelligence required to maintain their financial Hegemony. I have single-handedly reverse engineered the Global Banking System, and have rendered it unworkable so that I can take over Global Banking, and every bank in the world. Lastly, there are no Engineers in the world that can possibly grasp, or understand, the engineered destruction. It cannot be reverse engineered because that is a weakness of engineering that I foresaw before I launched the New World Disorder.

 

Have a nice day, Wall Street.

 

:)