Sunday, October 18, 2009
Has the Government Sowed the Seeds for Green Shoots or Another Depression?
Note: To those who think that keeping quiet about bad news and gloomy forecasts will help the economy recover, or that talking about them is unpatriotic, please read this.
You probably heard that Nicu Harajchi - CEO of N1 Asset Management - told CNBC on Friday that we're heading into a full-blown depression.
You may have heard that Paul Krugman said a couple of days ago that the collapse in global trade is worse than during the Great Depression.
But surely the worst is over, and the government has done what is necessary to help our economy recover. Right?
Well, if you get most of your financial news from the nightly news, you might not know what other experts have been saying.
As I wrote in February:
As I wrote in June:The International Monetary Fund (IMF) is the organization that audits the books of countries world-wide to determine their real financial health. The IMF is also responsible for bailing out countries in trouble, and stabilizing the world's economic systems.
The IMF has also performed a complete audit of the whole US financial system, and therefore has a clearer idea of American finances than just about any other organization.
So the fact that the head of the IMF is saying that the world's advanced economies are already in a depression carries great weight.
He is not alone. The following people have also said we are already in a depression:
- Nobel economist Joseph Stiglitz
- The former Secretary of Labor
- Leading investment advisor Ray Dalio
- Well-known investment advisor Doug Casey
- And many others.
- On May 11th, U.S. News & World Report pointed out that bank loan loss rates will be much higher than during the Great Depression
- On May 7th, Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb said "The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent."
Am I saying that there is definitely another Depression ahead?The following experts have said that the economic crisis could be worse than the Great Depression:
- Fed Chairman Ben Bernanke
- Economics professors Barry Eichengreen and and Kevin H. O'Rourke (updated here)
- Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb
- Former Fed Chairman Paul Volcker
- Nobel prize winning economist Joseph Stiglitz
- Economics scholar and former Federal Reserve Governor Frederic Mishkin
- Well-known PhD economist Marc Faber
- Former Goldman Sachs chairman John Whitehead
- Morgan Stanley’s UK equity strategist Graham Secker
- Former chief credit officer at Fannie Mae Edward J. Pinto
- Billionaire investor George Sorors
- Senior British minister Ed Balls
I hope not.
What I am saying is that the government's actions to date have not fixed the underlying problems or helped stabilize the economy. The government has been doing all of the wrong things and made the situation worse by, among other things:
(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent
(2) Undermining trust of nations all over the world in the American economy
(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system
(4) Attempting to restart high levels of leverage and securitization
(5) Failing to take real measures to decrease employment and increase manufacturingAs Stephen Roach - Chairman of Morgan Stanley Asia and former chief Morgan Stanley economist for the U.S. - said a couple of days ago:
(6) Creating an enormous debt overhang and trashing our currency
Those who are looking for a “V”-shaped recovery are in for “a rude awakening."
“The imbalances going into the crisis were large to begin with. Now, they are bigger than ever.”
4 comments:
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In Gold We Trust
ReplyDeleteG, this is a great macro picture of our situation. You provide multiple credible points of view to put a complex phenomenon into perspective. Thank you :)
ReplyDeleteYou previously wrote about a Truth and Reconciliation response; I see this as ideal to get to the roots of our economic oligarchy. This banksters' paradise needs to be exposed, removed, and replaced with a monetary and financial structure for the public benefit.
Failure to understand modern monetary theory is forcing policy into the constraints of a convertible currency-fixed rate system when we have had a fiat currency-flexible rate system since 1971. This means the government is never revenue-constrained and does not need to "borrow" to finance "spending." Increasing and decreasing net financial assets is done with computerized accounting entries affecting bank reserves. Simple as that.
ReplyDeleteThe government has monopoly power to provision the currency of issue. The only constraint on the government's ability to provision is inflation, which can only occur when the government provisions high powered money (physical currency and bank reserves) in excess of real capacity, that is, when nominal exceeds real.
The problem now is several fold, both nominal (financial) and real (production). The biggest problem has been solved, which was the freezing of the financial system. While the financial system remains impaired, it is functioning due to extremely accommodative monetary policy and the Fed's absorption of toxic assets directly onto its balance sheet. The major difficulty the government is facing here is not financial. It is forensic. To date, little accountability has been enforced, and fraud and corruption continue to rot the system. This is leading to public outrage and social unrest. The government has to attend to politic issues as well as economic.
The biggest problem now that the financial hemorrhaging has been stemmed is real, that is, under-capacity resulting in a significant output gap, as well as both unemployment and underemployment, with the attendant loss in GDP. The government must exert the will to close this gap chiefly through fiscal policy, that is, a combination of lower taxes and higher spending. Higher spending is especially necessary at lower incomes, where the need is great and the funds will be spent immediately into the real economy. So far too much attention is going into rescuing the financial system and not enough to the real economy.
Can the US "afford" this level of expenditure? No problem. The problem is with comparing the government with households and firms, which must dip into savings, sell assets, or borrow against future income. No such thing is true of a sovereign with a fiat currency, which is not revenue or asset constrained. The government increases and decreases net financial assets for the non-governmental system by accounting entries impacting bank reserves. It's as simple as that.
So why not just do it? Two major reasons. First, ignorance. Much economics is still based on the erroneous monetary theory, a hold-over from convertible currency-fixed rate days when governments were constrained by commodity money reserves. These has resulted in the prevalent neoliberal memes such as the idea that government spending inevitably raises taxes and interest rates, and that governments operate like households and firms with respect to revenue and debt.
Secondly, This approach is favorable to labor by targeting unemployment, and it is in the interest of capital to depress earning power to cut costs and raise profits, wages being the chief expenditure of businesses.
So the greatest worry at the moment is that governments will give in to pressure for "fiscal responsibility," that is, to tighten monetary policy while there is still an output gap, and to cut government spending. This will reduce the net financial assets of the non-governmental sector at a time that savings are increasing, exacerbating deflation. Given the level of private debt still in place, this will lead to more debt deflation, a wider output gap, and high levels of structural unemployment and underemployment for some time to come.
This is not just a US problem, but a global one.
Eloquently put. The government has a vested interest in misleading us. Particularly in the area of banking.
ReplyDeleteThe Coupe De Grace.
http://thecivillibertarian.blogspot.com/