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It’s The Depression, Stupid

Martin Wolf, in the Financial Times, will scare you today. [1] He says that by the numbers, we are in a “contained depression” — but that forces are building that threaten to breach the containment walls, and lead to total meltdown. Excerpts:

It is often forgotten that the failure of Austria’s Creditanstalt in 1931 led to a wave of bank failures across the continent. That turned out to be the beginning of the end of the gold standard and caused a second downward leg of the Great Depression itself. The fear must now be that a wave of banking and sovereign failures might cause a similar meltdown inside the eurozone, the closest thing the world now has to the old gold standard. The failure of the eurozone would, in turn, generate further massive disruption in the European and even global financial systems, possibly even knocking over the walls now containing the depression.

How realistic is this fear? Quite realistic.

More:

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.

Read the whole thing, [1] if you’ve got the stomach for it.

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14 Comments (Open | Close)

14 Comments To "It’s The Depression, Stupid"

#1 Comment By JonF On June 7, 2012 @ 6:25 am

The Euro acts like the gold standard within the Euro zone only. It has no such effect on the US, Canada, Japan, the BRICs countries, etc. That’s why I’ve said the US will like Canada in 2008 in this crisis: a bystander who may even benefit in minor ways.
And if the Euro goes go away it would free up Europe’s economies to escape the deflationary trap they are now in, just as jettisoning the gold standard ended deflationary pressure in the Depression. In fact, along with fixing the banks (via the FDIC) ending the link between the dollar and gold was the most effective thing FDR did. There’s lesson for Europe in this: unwind the Euro (at least from the outlier countries) but recapitalize the banks.

#2 Comment By rj On June 7, 2012 @ 8:38 am

Nope, no bloggers ’round here who share the belief that “widespread belief that suffering is good,” especially in countries with a lot of debt…

#3 Comment By Lord Karth On June 7, 2012 @ 10:17 am

Mr. Dreher quotes one M. Wolf, of the
Financial Times, as follows:

“I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime,”

Fragile economies ? That part I’ll buy. Whenever policy-makers overload their nations’ productive sectors with the burdens of welfare states and attempt to hide what they’re doing by invasive regulations and playing games with the value of the currency, they make their economies fragile.

But a “rigid monetary regime” ? Give unto me a BREAK. The Europeans’ problems are the result of allowing Greek-style hyperpoliticized, something-for-nothing-based economies to parasite off other nations’ productive workers.

“intense debate over what must be done, widespread belief that suffering is good,”

Poor word choice; that should read more like
intense debate over how to cover up our crimes and widespread belief that letting us (the members of the political class) stay in our jobs and not have to face jail time for what we’ve done is good.

“myopic politicians”

A gross redundancy, as well as a bold restatement of the blatantly obvious.
A politician in a nominal democracy must, by
definition, be myopic; his term of tenure in office (NOT service) comes up for renewal
at intervals. The ability to present a reasonable facade of non-criminality at such times is such creatures’ primary concern.

“an inability to co-operate and failure to stay ahead of events.”

Again, poor word choice.

A more accurate word choice would be “an inability of the individual members of a
group of thieves to maintain honor and loyalty to their collective, and a failure
of said individuals to maintain the illusions of their boodlers (a.k.a. campaign contributors) and marks (a.k.a. “voters”) in the face of incompetence that has been revealed by real-world events.”

“Perhaps the panic will vanish.”

Unlikely, and undesirable in any event. Re-
adjustment to actual world conditions, especially concerning the extreme imbalance
between the productive and parasitic sectors of the economy, is an essential in times like this. Correcting said imbalance would,
of necessity, require a severe cut in parasitic government expenditure, particularly on programs that encourage and
subsidize idleness. This, however, would severely annoy those who depend on such expenditures and lead to the removal of their political patrons from their current sinecures. Previous attempts to avoid this are the reasons we are in this state in the first place.

“But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks.”

True. This is part of the (to the political and State-beneficiary classes) uncomfortable and deeply disturbing phenomenon known as “REALITY”.

“Policy makers must eliminate this panic, not stoke it.”

But exactly how many of them will actually have a) the intelligence and knowledge-base to actually understand the problem;
b) the ability to act on Reality required to
persuade others of their class to accept actual facts, and c) the politically-suicidal intestinal fortitude to actually “follow through” on what Reality
requires be done ?

I suspect that I can number such fine fellows
on the fingers of my two hands, with several digits left over.

Still, at least this will keep boredom away. For a little while, anyhow.

Your servant,

Lord Karth

#4 Comment By Mont D. Law On June 7, 2012 @ 10:46 am

So you guys are pretty much doomed then. Whether Karth is right or Wolf is right Europe and the US are headed for an world destroying depression.

Which circles back to Manisfield’s discussion of austerity and politics as a hobby. The assumption that conditions that spawned the welfare state were not real or couldn’t reoccur if the welfare state is destroyed is erroneous. When the numbers of the poor and disenfranchised get too high, when their circumstances become too desperate, the state will have to respond. Historically states only have two options. The welfare state or or the police state.

Sucks to be you.

#5 Comment By alcogito On June 7, 2012 @ 10:51 am

“But exactly how many of them will actually have a) the intelligence and knowledge-base to actually understand the problem;
b) the ability to act on Reality required to
persuade others of their class to accept actual facts, and c) the politically-suicidal intestinal fortitude to actually “follow through” on what Reality
requires be done ?”

Scott Walker did. There are a half-dozen governors and a few Congressmen who do, and have now taken courage from Wisconsin’s example. Their support is growing. If it achieves critical mass in time…

#6 Comment By reflectionephemeral On June 7, 2012 @ 1:54 pm

“The Europeans’ problems are the result of allowing Greek-style hyperpoliticized, something-for-nothing-based economies to parasite off other nations’ productive workers.”

This is false, of course. Spain was running surpluses before the crisis. As Ronald Bailey put it in his review of Jim Manzi’s new book: “Human beings crave certainty. Throughout history, assorted shamans, haruspices, auspices, astrologers, sibyls, kaballahists, pyromancers, Hegelians, Marxists, palmists, tarot-card readers, stock chartists, and computer modelers have made good livings off of the apparently limitless market demand for more certainty…”

That appears to capture Lord Karth’s “bad things happen only to bad people, don’t-bother-me-with-facts” worldview. No one looks at the history of, say, the economies of the developed world in the 1930s, and concludes that the problems were due to government-subsidized parasitism. But it is a very comforting myth, so it is an impulse you often hear expressed.

#7 Comment By seaoctopus On June 7, 2012 @ 3:05 pm

The biggest problem of this current generation is the projection of personal morality frameworks onto macroeconomics.

Sorry kids, the way a government budgets is NOT the same as our family does it.

#8 Comment By alcogito On June 7, 2012 @ 6:19 pm

Sorry kids, the way a government budgets is NOT the same as our family does it.

Well, it ought to be:
*Don’t spend more than you can afford.
*Only borrow for big things, and only if you can afford the payments.
*Put aside an emergency fund for big or unforeseen expenses.
*Take care of your equipment.
*If your income is cut back, everybody helps out and expects less, except the baby.

#9 Comment By Mont D. Law On June 7, 2012 @ 7:12 pm

*Don’t spend more than you can afford.

So. Any and all services the state,federal and local government provides to you should stop now. Good bye police and fire services, all public education spending (vouchers included}, safe food and water, safe drugs, all infra structure spending, the post office, the weather service, government funded research, the national guard, FEMA and on and on and on.

*Only borrow for big things, and only if you can afford the payments.

So there goes the military and every soldier stationed anywhere not in the USA. No more weapons development or procurement, no more help for veterans. No more help for Israel or Africa. The Palestinians and Joseph Koney will be chuffed about that. No more state of the art any thing.

*Put aside an emergency fund for big or unforeseen expenses.

And in a bad year, when the emergency fund runs out? Whatever the emergency, it will be left untended because there is no money. So if there is another Johnstown flood or Katrina or bridge collapse or pertussis outbreak or huge multi-state tornado no help can be offered because money can’t be borrowed?

*If your income is cut back, everybody helps out and expects less, except the baby.

Are you allowed to borrow money to feed the baby?

#10 Comment By Nick On June 7, 2012 @ 8:39 pm

If Greece is so bad, tell me, why do they live longer on average than most people on earth? They must be doing something right.

#11 Comment By Lord Karth On June 7, 2012 @ 10:05 pm

Mont D. Law writes: “Whether Karth is right or Wolf is right Europe and the US are headed for an world destroying depression.”

Not right at the moment. The current mess in Europe will be resolved by the (hopefully) guided breakup of the eurozone, and in the USA by an end-of-the-year deal to avoid “Taxmageddon”. It won’t be at all pretty, but we’ll muddle through by means of allowing some form of deleveraging to slowly run its course through the economy.

The real problem arrives shortly after the 2020 elections, when Boomer retirements really start having an effect on the Medicare system. That, combined with a real debt crisis, will be far more likely to push us over the edge into economic collapse (and probable civil war in the USA) than what we’re dealing with now.

In other words, 2008 was just a warmup act. The Big Show begins in 9 years or so. And the clock is ticking.

Your servant,

Lord Karth

#12 Comment By Cecelia On June 8, 2012 @ 12:49 am

Karth – we could avoid that armageddon in 9 years by addressing health care costs – per capita health care costs US = $18,000 per year the closest to our costs in Europe – the UK = $7,000

We ain’t so healthy in this country we should be paying that much – I’d say something is very wrong here and as an alternative to bankruptcy how about we take a look?

What I don’t get about Americans today is that – given a choice between regulating the banks and financial institutions that got us into this mess – we go after Union members.

#13 Comment By Don Quijote On June 8, 2012 @ 6:23 am

What I don’t get about Americans today is that – given a choice between regulating the banks and financial institutions that got us into this mess – we go after Union members.

Have you ever seen crabs in a bucket? they are so eager to get out of the bucket that they keep jumping on top of each other and dragging each other down that none of the makes it out, that’s the American Middle class…

And then for good measure there is the fear that amongst the majority ethnic group that somewhere, sometime some minority may get something for nothing…

#14 Comment By Lord Karth On June 8, 2012 @ 11:13 am

Cecelia writes: “we could avoid that armageddon in 9 years by addressing health care costs – per capita health care costs US = $18,000 per year the closest to our costs in Europe – the UK = $7,000

We ain’t so healthy in this country we should be paying that much – I’d say something is very wrong here and as an alternative to bankruptcy how about we take a look?”

A good thought, Cecelia, and thank you for that, but the issue with that is that it hasn’t been tried, for political reasons. The blatantly fiscally insufficient and fundamentally spineless “Ryan plan” is the closest thing that this country has seen to an approach to dealing with Medicare. Yet even so timid a plan has been demonized to a degree that I have not seen anything in the Throne City demonized since Richard Nixon. There is simply no way that it or anything like it can get passed.

A serious plan would begin with both means-testing and major benefits reduction for all groups—including current beneficiaries, NOW. (Frankly, this discussion should have taken place in 1990, not 2012.) There are several reasons for that, but the most significant is the simplest: the ratio of beneficiaries to workers in the population is simply far too high to be sustained, and has been since at least Bush the Elder’s Administration.

Another reason for serious, real cuts is that the likely future productivity of the current working generations is simply not going to be as high, or grow as quickly, as was the case for the Boomers in the 70s/80s, or GenX in the 90s. The current working generations are facing historically unprecedented student-debt loads starting out in their working careers. They also will be facing historically high—world-historically high, not just by American historical standards—and increasing tax burdens through those already-burdened careers. Unless something is done to ease those debt burdens, both present and future, today’s workers will not only be less able to build the independent wealth they will need to deal with their own retirements, but will be starting off from a smaller base.

I’ve said this before on other threads; the one sure sign that this impending asteroid-impact of a financial situation in the USA is going to be seriously addressed will be the passage of amendments to the current Bankruptcy Code that will allow student debt to be dischargeable. (Currently it is not.) This will most likely come to pass when GenX and Millennials become the dominant voting demographic in enough provinces to elect Xer/Millennial-cohort majorities in at least one house and get that reform enacted.

I don’t see that happening in the next nine years. Maybe by 2032, but not by 2020. There are simply far too many Boomer and Silent retirees who will act to preserve their benefits, and the funding sources for those benefits, to allow this to happen.

Which means the Medicare crash and the whopper debt crisis probably cannot be prevented. I’m no statistician, but if I was pressed, I’d say that the chances of avoiding some form of serious crash/crisis combination (and resulting civil unrest) are under 15 % in the time-frame mentioned.

Avoiding it entirely ? Not going to happen, not under current voting-rights laws.

We can certainly try some sort of health-care payment reform; I have long been in favor of an HSA/catastrophic-insurance model, and enacting Elder-Support laws as a complementary payment model, but such things are simply not politically supportable.

Too bad.

Your servant,

Lord Karth