Irene and the Broken Window “Fallacy”

Doug Matacons argues that Paul Krugman is wrong with what Doug calls the “broken window fallacy”:

What this argument ignores, and what people like Krguman and this Politico reporter refuse to recognize is the simple fact that destruction does not create wealth. The money that will be spent to rebuild, repair, and recover from Irene will doubtless line the pockets of the various contractors that will be hired to perform said work, but to argue that it “creates wealth” is simply a fallacy. By some estimations, the losses from Hurricane Katrina will total in the tens of billions of dollars. That’s wealth that doesn’t exist anymore, it’s gone. The money that will be will be used to pay for the recovery already exists and, rather than being invested in other projects, it will go toward repairing the damage caused by natural disaster. A home damaged by Hurricane Irene will be no more valuable after it is repaired than it was the day before the storm hit, for example. And this analysis doesn’t even take into account the losses from lower consumer spending that businesses will feel as a result of the storm, all of which will reverberate out into the economy as a whole.

Doug then applies to Frédéric Bastiat for this line of new classical thinking:

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Yes – economists like Krugman and Keynes must be “bad economists” for looking out at the real world and recognizing that we are far from full employment. I would like to give a lot of credit to Irwin Kellner for this:

The bad news is pretty obvious: Countless houses and cars were smashed by fallen trees; there was lots of water damage from the storm itself, as well as from the water that spilled over from nearby rivers and lakes — and even from the ocean. Widespread power outages left millions in the dark, spoiling food and depriving people of air conditioning. Many businesses had to shut their doors for as long as a week. For retail outfits, this is lost revenue that is unlikely to be made up. The damages have yet to be totaled up, but estimates of $7 billion or so seem to be common ...For their part, restaurants either forced to close their doors or bereft of their usual complement of customers will not be able to make up these lost receipts. The same goes for other retailers like gasoline stations and department stores. Theaters will be unable to make up for the last-minute walk-ins at canceled performances. Cities like New York, which shut down their mass-transit systems and waived tolls on bridges and tunnels, will be unable to recoup these losses as well. Although occurring more than halfway through the third quarter, the effects of this storm could be enough to reduce growth in the gross domestic product by anywhere from a half to a full percentage point.

In other words, Irwin starts with all those negative impacts from Irene that we can see. But Irwin goes onto to note the boost to aggregate demand expected to come in the last quarter of this year. Is Irwin being a bad economist for not seeing the crowding-out effects that Bastiat talked about? Of course not! Shall we repeat? We are far from full employment!

The Long Depression And the Great Recession

A substantial debate over the nature of the the deflation in the US during the 1873-1896 period has erupted on marginal revolution, http://marginalrevolution.com/marginalrevolution/2011/08/the-deflation-of-1873-1896.html#comments . Much of the debate centers on reevaluations of the path of real US output during the so-called "Long Depression" of 1873-79, with newer sources arguing that declline in real output only lasted from 1873-1875, thus arguing that it was not as bad as many thought, and while indebted farmers were hurt by deflation, particularly by the 1890s, this was a golden age of the American economy and a model for laissez-faire policy, with the deflation itself generally a good thing outside of agriculture (whose falling prices helped the rest of the economy).



I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.



So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.



The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.



Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.

Why Would Eric Cantor Insist on Paygo for Irene Disaster Relief?

Eric Cantor stated his position:

"Yes there's a federal role, yes we're going to find the money -- we're just going to need to make sure that there are savings elsewhere to continue to do so," Cantor told Fox News on Monday.

Cantor has suggested before that we don’t have the money for additional government spending. And I guess if one were foolish enough to believe we were near full employment, one might worry about the crowding-out of private spending. Cantor, however, undermines both claims with his August 29 memo that claims its agenda is to create new jobs with part of his policy message being tax cuts. On policy grounds – Cantor has no principled reasons for this application of paygo.

Thomas Hoenig and the Ever-Expanding Universe of Excuses for High Interest Rates

It’s now a week old—an internet lifetime—but we shouldn’t let this pass without comment.  In an interview with Gretchen Morgenson, departing Fed district president Thomas Hoenig offers this bizarre justification for his votes against near-zero interest rates since the 2007 collapse:

We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.

Global imbalances made me do it!  Think for a moment, however, and the argument makes no sense at all.

Low interest rates encourage borrowing of all kinds, for production as well as consumption.  All the current export-oriented economies—Germany, China, and before them Japan and Korea—achieved their miracles in low interest rate environments.  The thing is, they had cultures, institutions and policies that steered credit toward producers and away from consumers.  In recent decades the US has had none of the above, and a loss of export capacity and competitiveness has been the result, even though the corporate sector is awash with liquidity.

High interest rates, on the other hand, choke off consumption, but they also discourage investment, and deficient demand is hardly a spur to the creation of new capacity.  There is no theoretical or empirical basis for Hoenig’s argument; it reflects badly on him and the normally shrewd Morgenson should have picked up on it.

To be charitable, however, Hoenig’s fantasies are no more implausible than those of many other inflation-hawks.  We hear claims that inflation reaches an ominous tipping point at 3% or so, after which it is nearly irreversible.  Or that big shifts in the velocity of money are simply a mirage, and central bank injections have to be reflected in price increases, ever and always.  Or the ultimate whopper, peddled shamelessly to the masses, that inflation represents a decline in purchasing power, an assault on the poor, defenseless consumer, even though this is contradicted by the simple logic of the circular flow.

The fact is, there will always be a market for high and low arguments in support of tight money and excess inflation hawkery.  From a social point of view, inflation can be either too low or too high, but from the perspective of creditors the risk is always on the too-high side.  Thus arguments have to be crafted, out of thin air if necessary, to justify putting the war against inflation ahead of all other social objectives.  Hoenig, no matter how absurd his pronouncements, will always be more accepted in the higher circles of finance than apostates like Blanchard and Stiglitz, who look at inflation rationally, in the context of broader economic policy.

Understanding Debt

The “embeddedness” argument of the economic sociologists and anthropologists applies supremely to debt.  If you have any doubt, read this captivating interview with David Graeber (via Naked Capitalism).  Here’s a nice quote, pulled from near the end, after a long discussion of monetary and credit practices in different times and places:

What’s been happening since Nixon went off the gold standard in 1971 has just been another turn of the wheel – though of course it never happens the same way twice. However, in one sense, I think we’ve been going about things backwards. In the past, periods dominated by virtual credit money have also been periods where there have been social protections for debtors. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich? That’s why you had Mesopotamian clean slates, Biblical Jubilees, Medieval laws against usury in both Christianity and Islam and so on and so forth.

Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.

The name that is missing from this interview (I don’t know about the book) is J. M. Keynes.  Keynes had clearly confronted the moral aura surrounding debt, and his approach to monetary policy above all tried to strike a pragmatic balance between the interests of creditors and debtors.

Economic Policy For A Post-Qaddafi Libya

Yesterday Juan Cole at http://www.juancole.com posted "How to Avoid Bush's Iraq Mistakes in Libya," listing ten matters and noting that "arqana," or "Iraqization," is now an Arabic word, and is not used favorably by anybody anywhere, even if some neocons continue to attempt to turn the Bush-Iraq mess into something admirable. Of the ten points Cole makes (all of which I agree with to varying degrees), five have to do with economic policy.

Point 5 is that the Libyans should avoid "privatizing everything." In Iraq we brought in a bunch of young idealistic pro-free-marketers who attempted this, only to have many of these previously state-owned factories/enterprises, simply go out of business, thereby exacerbating the major economic problems facing Iraq. They should have learned from the transition from the Soviet model in the former Soviet bloc. Countries that attempted sudden privatizations, such as Russia, ended up with badly managed companies being bled dry by corrupt owners. More successful cases, such as Poland, engaged in gradual and carefully managed privatizations. Libya should follow that example, not the idiocy in Iraq (or Russia).



Point 6 is to consult with Norway about how to be an oil exporter and maintain a democracy (hopefully non-corrupt, an issue Cole does not discuss). This is wise, but also more difficult and problematic. For one thing, there is the matter of simply getting a democracy in Libya after not having had one. There are also many differences between Norway and Libya, but indeed, the effort to try to avoid the all-too-widespread phenomenon of corruption and dictatorship such as Libya has been an especial curse of major oil exporters.

Point 7 is to adopt the Alaska dividend system, in which oil profits (or some of them anyway) are distributed to the population as a dividend. This is something that was suggested for Iraq by such pro-free-market economists as Vernon Smith, but not adopted. But I see nothing wrong with this. Indeed, this is a way to make sure that some of the benefits of the oil production do get to the population and do not just end up going to a bunch of corrupt cronies of whomever ends up in charge, however they get to be in the position of being in charge. I support this one.

Point 8 is a warning to diversify to avoid "Dutch disease." On this one, I think that Cole is underestimating how hard this is to avoid. This looks like wishful thinking, good luck on it, Libya, but it is hard to do. Cole suggests encouraging education, and Libya does have a fairly well educated population, which is good in itself, but this will not necessarily overcome this very tough problem.

Point 10 is to go for alternative energy in the long run after they have gotten their act together in the shorter run, particularly solar and wind. They certainly have potential there, and I do not disagree with this one, but also figure that they will have a lot to do before they can focus on that. Again, I agree with the other non-economics points Cole makes, but will not list them here.

Hallig Hooge

I’m just back from a trip to the North Frisian Islands.  Tens of thousands flock there for vacations each summer, inundating the long, car-choked island of Sylt and the much nicer but still busy Amrum.  My strongest impression, however, was the lonely landscape of Hallig Hooge, the small island just NW of Pellworm.

Several thousand years ago most of the North Sea between England and Denmark (the German Bight) was above water.  Neolithic people roamed freely over the entire area, hunting game and later practicing agriculture.  As the sea level rose, solid ground turned to marsh and was then submerged altogether.  Eventually there was only the string of islands clutching the coast from the Netherlands to Denmark with the strange rock table, Helgoland, sitting almost by accident 40 miles from shore.

People continued to live on the coastal islands, but life was hard, especially since homes and fields were vulnerable to inundation by winter storms.  From time to time a particularly severe storm would turn island into sea in a single, deadly onslaught.

Around 800 AD or so, the Frisians settled this precarious region, preferring the struggle against mud and sea to subjugation by foreign rulers.  Their strategy on the most threatened islands was to build giant mounds by hand, on which they built their houses, hopefully above the storm tide.  This was the original settlement design in the Netherlands before the swamps were drained and the dikes erected, but in the North Frisian Islands the mounds – called warften – can still be seen and still play a crucial role in preserving outposts of settlement.

Hooge is one of these Hallig islands.  We tied our little boat to an old wooden bridge, where it was half-swallowed by mud at low water.  There were two other neighboring boats and several kayakers camped out at a nearby hillside: that was harbor life.  Other than a few horse-carts to ferry small groups of tourists from one hallig to another, not much was going on, which was fine.

Here you can see the overall landscape, flat with a warft in the distance.

Get closer, and the profile of a warft takes more familiar form, a house on a hill – only the hill was the product of centuries of hard physical labor.

The German government subsidizes the hardy few who continue to live on these Hallig islands; they are seen as a force for stabilizing the precarious coastal environment.  A small trickle of visitors, like myself, come to see them each year to marvel at this obstinate, somewhat irrational lifestyle.  Modern Hallig residents, of course, are safer than their ancestors, and they have satellite dishes and motorboats to zip back and forth to the mainland.  Still, they are the heirs to a long tradition of hanging on, against great odds, to the fragments of a former land.

Continued sea level rise due to climate change will guarantee that this century is their last.

Governor Christie Calls Cap and Trade Gimmicky

The governor of New Jersey is receiving criticism from rightwing nuts for admitting the obvious - that climate change is real and that human activity plays a role. I’m sorry but that is not the real story. The policy decision was for his state to do nothing:

Gov. Chris Christie Thursday declared the nation’s first regional cap-and-trade program designed to reduce air pollution a failure and promised to pull New Jersey out of it by the end of the year. While acknowledging humans contribute to climate change, Christie called the Regional Greenhouse Gas Initiative a "gimmicky" partnership and said it does nothing to reduce the gases that fuel the problem.

Christie joined other opponents of cap and trade by complaining how it would raise the cost of doing business as if this were a “job killer” – the new buzz word for rightwingers when they oppose something. But isn’t that the whole point of cap and trade – to induce private agents to shift their activities away from those that add to greenhouse emissions via the price system.



Christie’s decision to withdraw from this regional cap-and-trade program is bad policy but this is the kind of policy decision conservatives are turning to in order to gain political favor with rightwing nuts. But I guess this was not enough for some people.

The Imminent Fall From Power of Muammar al-Qaddafi

See http://www.juancole.com for details of the uprising in Libya's capital, Tripoli, emanating from the working class districts in the eastern part of the city. With rebel forces having now captured most of the key towns around Tripoli and moving in, and with many of his top officials defecting, it looks like the end is near for the Qaddafi regime, one of the longest ruling in the world at over 40 years.

Shortly after the uprising began I was one of the first to forecast (here) the serious possibility of a partition and stalemate between the rebel East and the loyalist West. This was based on the long historical, ethnic, religious differences between the old Roman province of Cyrenaica in the East and Tripolitania in the West, and for many months it looked as if that would be the case, with the border at Brega in the center of the main oil region. But things have finally gone the rebels' way after a long time and external support by NATO (or some of it).


The main kicker in the fall of Qaddafi and the end of the stalemate has been that Qaddafi was never able to fully control the West. In particular, besides the coastal city of Misrata going to the rebel side, the Berbers in the mountains in the West were never subdued, and it was they and other tribes gradually taking towns in the deep South and then finally coming down out of the mountains to start taking other coastal cities and now moving in on Tripoli that have been mostly responsible for this change. The great irony here is that Qaddafi himself is of ethnic Berber origin. However, he had rejected the identity and become Arabized and made insulting remarks about other Berbers, who are now going to get their revenge.

Before he falls it may be important to remind ourselves of some curious history of Qaddafi. In the years shortly after he first took power, he played an important role in the changing political economy of oil in the world, particularly when he nationalized the Getty Oil Company's operations in Libya in 1970. That led to two things, as I described in my 1981 JPKE paper, "The Megacorpstate and the Acceleration of Global Inflation." One was that Getty had been the main independent operating in the Middle East, not one of the Seven Sisters, and had played a competitive fringe role in keeping oil prices low, which ended, thus putting more power in the hands of the producers generally. The other was that it touched off a wave of nationalizations of oil holdings throughout the OPEC nations, with the OPEC oil price increases in 1973 coming from countries largely in control of their own oil supplies. Many saw this as a progressive anti-imperalist and anti-colonialist development, although given the dictatorial and corrupt (and often reactionary) nature of most of these regimes, this has not turned out as many had hoped.

In the end, Qaddafi's own regime was an example. There were many progressive things done by his regime initially, somewhat along the lines of what the Ba'athists in Iraq did with their oil money, free education, building of hospitals, and so on. However, over time this all became degraded as the corruption and repression by the dictatorial regime became worse and worse, and more and more groups became unhappy with his rule, until we have finally reached the point we are at now, with rebel forces on the verge of removing him after his long rule. One can only hope that the successor will be better than the one in Iraq, and given the lower key role the US has played, with, as Juan Cole notes, a rebel uprising in Tripoli itself now involved and Libyans themselves overthrowing the regime rather than the US (or other foreign) military, there does seem reason to be at least somewhat optimistic about what may come out of this.

Smacking Down Self-Plagiarism - The Bruno Frey Affair Becomes Official

The latest issue of the Journal of Economic Perspectives (JEP) has just gone up online and includes the replication of a letter exchange between its editor, David Autor of MIT, and Bruno Frey, regarding accusations that a paper published by Frey and two coauthors (Benno Torgler and David Savage) self-plagiarized three other papers by them appearing earlier in the Proceedings of the National Academy of Sciences (PNAS), the Journal of Economic Behavior and Organization (JEBO), which I was editing when that paper was submitted and accepted and published (and was the first version submitted to any journal), and Rationality and Society (R&S). None of these highly similar papers cited any of the other ones. In his letter, addressed to the editors of the other journals as well as to Orley Ashenfelter, President of the AEA and John Siegfried, longtime AEA Secretary-Treasurer, Autor accuses Frey of having engaged in conduct "ethically dubious and disrespectful to the American Economics Association [publisher of the JEP], the JEP and the JEP's readers." Frey, speaking on behalf of one coauthor, his former student Benno Torgler (Savage is currently Torgler's student, and they both pleaded for Savage not to be punished), stated "we deeply apologize" and "This is deplorable." (referring to their conduct). This can all be found at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.3.239


While the investigation by Autor began earlier, this matter has been a matter of public discussion for almost half a year. Among the earliest to post on this was the anonymous blogger, Economic Logician at http://economiclogic.blogspot.com/2011/04/on-ethics-of-research-cloning.html. While some others have picked up on this, including at the Wall Street Journal, incompetently originally Andrew Gelman, and many threads on the notorious anonymous blog, econjobrumors, the most significant figure to weigh in has been Olaf Storbek, a top correspondent at Handelsblatt at http://economicsintelligence.com/2011/07/07/a-summary-of-the-bruno-frey-affair . This was particularly important in that Handelsblatt ranks economists within the German-speaking world, and in recent years Frey had been at the top of their rankings due to his numerous publications, clearly puffed to some extent by this sort of unacceptable practices.

I have commented on the problem of plagiarism in general in an essay I have mentioned here before, "Tales from the editors' crypt: Dealing with accusations of plagiarism, true, uncertain, and false," available near the bottom of my website at http://cob.jmu.edu/rosserjb , which is forthcoming in a book of essays by journal editors. I have a section in there on self-plagiarism, which Frey quoted after I sent him a copy. I note that self-plagiarism is not as bad as plagiarizing others, but nevertheless condemn it as unacceptable and note that its "red flag" is the failure to cite closely related papers.

I will note that there have more recently been accusations of outright plagiarism of others, particularly of a paper appearing in 1986 in a sociology journal by Wayne Hall. This has been denied by the authors, and I do not believe anybody can prove anything one way or the other on that accusation. I also note that the topic of all these papers has been the conduct of people on the Titanic as it sank in connection with various social norms (One was more likely to survive if one was rich, an American, a woman or child, or a member of the crew).

While I am pleased at the outcome of this matter (which is not fully complete as there are university investigations still going on), I am sad about this regarding Bruno Frey. He has written many interesting papers, even if sometimes taking too much credit for himself. I published several papers by him when I edited JEBO, and I had friendly relations with him (no, have never met the guy in person). I regret that this has happened, but I think that the message needed to be sent that this sort of practice is professionally unacceptable, and I am glad that those in the positions of greatest authority, particularly David Autor, have acted to send the message.

Great Moments in Punditry: Calling Dean Baker

46: "And so defenders of faith in the Bush boom abounded, typically in and around the Bush administration. Early in 2005 in the Washington Times, James Miller III, who had served as Ronald Reagan's budget director, lauded "the efficient U.S. arrangements for housing finance" as "the envy of every other country." The trillions going into home loans reflected the accumulated wisdom of a competitive financial system: "Gone are the days of mortgage credit crunches and exorbitant mortgage rates spreads. American homeowners . . . are assured of a steady, liquid, and generally affordable supply of mortgage credit. And investors, both domestic and foreign, are provided a flow of debt- and mortgage-related securities that are highly liquid, transparent, and secure." Miller, James III. 2005. "Should Homeowners Worry?" Washington Times (7 January): p. A 17.

46: "Also in 2005, Alan Reynolds of the Cato Institute disparaged " the economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the 'housing bubble' about to burst, with a supposedly devastating impact on household wealth. ... In short, we are asked to worry about something that has never happened for reasons still to be coherently explained. 'Housing bubble' worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is." Reynolds, Alan. 2005. "No Housing Bubble Trouble." Washington Times (8 January).

46: A few months later Larry Kudlow, the National Review's economics editor, wrote a column titled "The Housing Bears Are Wrong Again," whose subtitle claimed that the housing sector was "writing [a] how-to guide on wealth creation." In it, Kudlow dismissed "all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market." [Kudlow, Larry. 2005. "The Housing Bears and Wrong Again." National Review online (20 June). In the subsequent three years, the housing sector oversaw the destruction of trillions of dollars in household wealth; and housing prices in Las Vegas and Naples, Florida, declined by over 50 percent, bringing down the consumer, rest of the economy, and the entire stock market. And despite Miller's faith in the mortgage market, the lack of transparency and liquidity in the securities being snapped up by investors, domestic and foreign, very nearly brought down the entire international financial order."

46-7: "The fact that many of the optimists worked for the housing industry might have been a tip-off. One David Lereah, then chief economist of the National Association of Realtors, published a book in 2005 called Are You Missing the Real Estate Boom? and re-released it in February 2006 with an even less subtle new title: Why the Real Estate Boom Will Not Bust. Of course, Lereah's advice devastated those who followed it. Nonetheless, as he told BusinessWeek several years later, after leaving his position with the housing lobby, "I worked for an association promoting housing, and it was my job to represent their interests." Gopal, Prashant. 2009. "Former Housing Industry Economist Who Famously Said There Is No Housing Bubble Now Admits He Was Wrong." BusinessWeek (5 January).

Source: Chinn, Menzie D. and Jeffry A. Frieden. 2011. Lost Decades: The Making of America's Debt Crisis and the Long Recovery (New York: W. W. Norton).

The crisis of the global economy. Was it a planned disintegration?

“The biggest propaganda story this decade is the fiction of the Japanese and now Chinese workers are thrifty folks who want to desperately save money and they want this so badly, they will happily toil away in order to hand over this loot to the American consumer who will then spend it for them! And everyone lives happily after living off the blood and sweat of those foolish Asian workers who don't know how to have fun, hahaha."

So penned Elaine Meinel Supkis in her 2007 article exploring the reasons for the existence of the global money glut. [1]



Russian writers Vasily Koltashov, Boris Kagarlitsky, Yuri Romanenko and Igor Gerasimov provide a wider (and clearer) context for the imbalance between the world's monetary base and its real economy. "The world economic crisis ... is systemic in nature" they wrote and comes about through the "contradictions of the neoliberal model of capitalism" - an economic model, they say, that is based on the "exploitation of cheap labor power in the Third world", the systematic lowering of real wages whilst stimulating consumption in the rich nations.

"...The scope for intensifying this exploitation has been almost exhausted."[2]

Not surprisingly, given the way that consumption was expanded by whatever means available, including through the ballooning of debt and the stepped up, extremely modern, efficient (and mostly institutional) environmental pillage.



John Bellamy Foster provides his own elaboration of the contradictions in today's global capitalist economy:

"Three critical contradictions make up the contemporary world crisis emanating from capitalist development: (1) the current Great Financial Crisis and stagnation/depression; (2) the growing threat of planetary ecological collapse; and (3) the emergence of global imperial instability associated with shifting world hegemony and the struggle for resources. Such structural weaknesses of the system, as Joseph Schumpeter might have said, are the product of capitalism’s past successes, but they raise catastrophic problems and failures in the present nonetheless."[3]

It certainly feels to me like we're all now (metaphorically) standing at the pinnacle of a 'contradiction mountain' built up over the last two hundred years; with a cliff edge descent into some oddly familiar future existence.



The historical evolution to present day seems to have gone something like this:





The industrial revolution created humans as factory commodities during work time and as consumers the rest of our waking time. Small businesses and 'the market' were either killed off or transformed into giant corporations and then into corporate conglomerates forming global and state-sponsored cartels. Processes of 'exchange' became extremely distorted as giant firms traded with themselves[4]. Values were thus able to be set by the manipulations involved in international 'transfer pricing' where parent firms overprice the products it 'sells' to its subsidiary and underpays for the products it 'buys' from that same subsidiary.[5]



The economic base of nation after nation became overly-dependent on TNC-controlled export markets and foreign sources of supply. Giant global trading cartels enlarged their power and economic base by siphoning off scarce local resources cheaply and by killing off as many avenues as they could find where local 'self sufficiency' might take hold. The world's largest and best known transnational corporations implemented scheme after scheme to control world trade. "They all share one simple purpose: to reduce competition and thereby increase profit."[6] The governments of the world's wealthiest nations worked closely with their TNCs to increase their dominance in world 'trade'. Capitalism, once examined closely enough, can be seen as 'statist' from its very beginnings, but that is another story.



The early 1970s heralded a 'strange new economic epoch' "which might best be called the Age of Stagflation." This triple whammy of high global unemployment, with inflation and slow growth has continued to present day. Orthodox economic dogma pushed the notion that inflation was very sensitive to high levels of employment in the general economy. Yet it turned out to be "morbidly sensitive to the growth rate." Energy prices skyrocketed in that decade as global oil production per capita began to stabilise and then peak in 1979. It was a convenient time for a failing American global hegemon to take advantage of petrodollars to provide the foundation for its future economic growth and unending wars.



Recessions around the world have became more severe and last longer since the 1970s. Recoveries are "shorter and less complete."[7]



In the 1980s saw a rapid consolidation of TNC power and an almost complete abandonment of all forms of social and environmental regulation over the activities of these giant state-sponsored institutions.[8]



By the 1990s world GDP had slowed dramatically and people in the 'developed' nations relied on consumer credit to retain living standards. [9] In 1994 Third World Debt was reported to be compounding by 20 percent per year [10] Corporatist world governance, at the same time, "allowed China and its multinational capitalist friends to game the system" through a process of 'currency mercantilism' whereby "China ...devalue[d] its currency...against the world's reserve currency, and thereby set up a set of artificial import barriers and export subsidies, simply by manipulating their currency." [11] Japan, however and according to research by economist Lester Thurow, was "the major fault line across world trade and the pacific rim".“

The American current account deficit ($145 billion on 1994) and the Japanese current account surplus ($130 billion in 1994) are essentially mirror images of each other. Neither could exist without the other. To talk about either is to talk about the other... The problem is that no one outside of a few raw material producers (or those who restrict Japanese imports) runs trade surpluses with Japan. Everyone else runs large trade deficits with Japan, which they finance by running even larger trade surpluses with the United States.[12]

” Why is this?

"Japan for the last 18 years is in the grip of deflation and to kick-start the economy and to make its economy and exports competitive, Bank of Japan (BoJ) has resorted to three-pronged policy of (i) Quantitative Easement (ii) Zero Interest Rate Policy (ZIRP) and (iii) Weak Yen. Policies of QE, ZIRP and Weak Yen has offered Hedge Funds great opportunity to avail Credit in Japan at a Zero Cost and to utilise the proceeds in other markets and thereby making handsome returns in the process."[13]

America's trade deficit, then, is tied intimately to our failed global monetary system! Take the cheap Japanese credit back to the US, flog consumer and housing loans to the unwary citizens and charge them much higher interest rates. Instant monetary returns until some distant future when the game finally collapses; as it began to in 2007.



In the first decade of the new millenium the global inflation that had been (deliberately) hidden in rising asset price bubbles came into the full view of the public. Money lost appeared to have very little backing in the real world as the share and property markets plunged in America and other industrial nations. There was a limit to the amount of debt that people can sustain, afterall.



When the monetary value of the assets that support consumer and household debt plummeted "Consumption [began] to decline, and demand [became] concentrated on goods of primary necessity." [14]



It could be a happy coincidence that the trade and monetary ponzi game has finally played out at the very time the world reaches peak oil production. But I doubt it. Paul Volcker, the former head of the Federal Reserve Bank, said in 1979 when he was recently named chairman:

"We have argued here that asymmetric prudential oversight tends to follow asymmetric hegemonic power, in a world in which recurring financial crises set up market-entry and wealth-enhancing opportunities for financial firms headquartered in nations with hegemonic capacity. And recurrent financial crises combined with a loss of regulatory discipline lead, in the end, to a systemic breakdown beyond the rescue capacity of even the greatest monetary hegemon."[15]

He seemed to know what was slowly panning out. In fact, the year before Paul Volcker delivered the Fred Hirsch Memorial Lecture at Warwich University in England entitled ‘The Political Economy of the Dollar’. He stated:

"A controlled disintegration in the world economy is a legitimate object for the 1980s."[16]

What did he mean by that? Almost a year later the world economy did start to go into freefall when Mr Volcker, starting the week of Oct. 6-12, 1979, "began raising interest rates, by raising the federal funds rate and increasing certain categories of reserve requirements for commercial banks. He kept pushing rates upward, until, by December 1980, the prime lending rate of U.S. commercial banks reached 21.5%."[17] Bang went the sustainable indigenous economies of the Third World as peasant were subject to forced urbanisation and their land acquired for giant export agribusinesses to pay off this zapped-up national debt.

"...oil shocks, credit cut-offs (to mainly already struggling poorer nations) interest rate shocks, IMF austerity measures, etc., forcing the world economy to go to zero, and eventually negative growth.[18]"

have certainly destroyed the prospect of a strong, healthy human economy. Pity the ecological basis for our future prospects went with it.



[1] The Global Money Glut Starts In US Treasury

Baby_miz_liberty_wants_lollipop_3

Elaine Meinel Supkis



[2] Russia and the Crisis of the Global Economy

Vasily Koltashov, Boris Kagarlitsky, Yuri Romanenko, Igor Gerasimov

Institute of Globalisation and Social Movements, 14 July 2008

http://www.tni.org/detail_page.phtml?&act_id=18498



[3] A Failed System

The World Crisis of Capitalist Globalization and its Impact on China

John Bellamy Foster

http://www.monthlyreview.org/090302foster.php



[4] It's NOT international trade. Don't be fooled.

Brenda Rosser, Thursday, July 24, 2008

http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html



[5] Kurt Rudolf Mirow and Harry Maurer. 'Webs of Power - International Cartels and the World Economy'. Houghton Mifflin Company, Boston. 1982. page 205



[6] Kurt Rudolf Mirow and Harry Maurer. 'Webs of Power - International Cartels and the World Economy'. Houghton Mifflin Company, Boston. 1982. page 185



[7] Kurt Rudolf Mirow and Harry Maurer. 'Webs of Power - International Cartels and the World Economy'. Houghton Mifflin Company, Boston. 1982. page 185 and 186.



[8] What really happened in the 1980s and where are we now?

Brenda Rosser. 22nd June 2011

http://econospeak.blogspot.com/2011/06/what-really-happened-in-1980s-and-where.html



[9] Reader Juan – ‘Hoisted From Comments: Has Neo-Liberalism Failed to Deliver the Goods?’

Naked Capitalism. Saturday, July 5, 2008

http://www.nakedcapitalism.com/2008/07/hoisted-from-comments-has-neo.html



[10] — J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 143.



[11] The Great Flaw in the Free Trade Theory And Other Vain Beliefs, Hoaxes, and Follies

ilene's picture

Submitted by ilene on 08/12/2011 12:30 -0400

http://www.zerohedge.com/contributed/great-flaw-free-trade-theory-and-other-vain-beliefs-hoaxes-and-follies

and

STOCK MARKET KEYNESIANISM ….WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA - THE ORIGINS OF THE CURRENT CRISIS. Robert Brenner



[12] The Future of Capitalism – How today’s economic forces will shape tomorrow’s world’ Lester Thurow. . ISBN 1 86448 429 2. Allen & Unwin Pty Ltd, Australia. 1997. Chapter 10. Page 194.



[13] THE UNWINDING OF YEN CARRY TRADE

Bal Thakur

http://www.webstonne.com/YenCarry.html



[14] Russia and the Crisis of the Global Economy

Vasily Koltashov, Boris Kagarlitsky, Yuri Romanenko, Igor Gerasimov

Institute of Globalisation and Social Movements, 14 July 2008

http://www.tni.org/detail_page.phtml?&act_id=18498



[15] As quoted in:

The Sky did not “Fall” in 2008: Hegemonic Transition & the Subprime Crisis

Gary A. Dymski Gary A. Dymski

Executive Director, University of California Center Executive Director, University of California Center

Sacramento Sacramento

Professor of Economics, UC Riverside (on leave) Professor of Economics, UC Riverside (on leave)

Gary.dymski@ucop.edu

URPE@ASSA 2009 URPE@ASSA 2009 – – San Francisco

http://www.econ.uoa.gr/UA/files/372152746..pdf



[16] Volcker’s speech at: http://www.nyfedeconomists.org/research/quarterly_review/1978v3/v3n4article1.pdf

..\..\..\EconomicHistory\1978-EH\Volcker-9Nov1978.pdf



[17]PROJECT 80S: THE CFR'S PROGRAM FOR "CONTROLLED DISINTEGRATION"

By Angie Carlson

August 8, 2001

NewsWithViews.com

http://www.newswithviews.com/socialism/socialism1.htm



[18]PROJECT 80S: THE CFR'S PROGRAM FOR "CONTROLLED DISINTEGRATION"

By Angie Carlson

August 8, 2001

NewsWithViews.com

http://www.newswithviews.com/socialism/socialism1.htm

What lies behind the debt ceiling 'crisis'?

Below I have posted some brief comments made recently by Diane Warth (our Econospeak administrator) on the recent US debt ceiling 'crisis'. "

I don’t believe the recent debt ceiling “crisis” was anything but a media circus designed to usher in the “necessary” dismantling of Social Security – Obama is a Wall St. puppet and the outcome was his intent. It’s a distraction.



The real story, in my opinion, is the bubble of arrogance the players insist on floating – encouraging the public to invest blindly in the virility of the US econ engine which prevents them seeing the fiat can they keep kicking down the road has hit a dead end. The financial elite do realise it and are hedging their bets on it. When the can hit the wall the elite created derivatives. Stiglitz challenged any economist to define derivatives. Not only did Wall St. create a catastrophically obscene amount of its own fake money, the Fed printed money to bail them out when the bubble burst. The scenario will repeat – what will stop it. The Indian economist Jayati Ghosh sees it happening in commodities.



The US is waging 7 wars and whilst its main exports are war-toys a manufacturer’s primary customer should not be itself, no? The “wars” are not going well. War is insanely expensive – robotics, PTSD, the medical costs alone would be injurious to the healthiest of economies let alone an unimaginably impaired one that has no real change in the works. The govt. can’t privatise the military quickly enough. Then there are the long-term health costs of new age weaponry, as well, not only does Japan have to deal with rebuilding infrastructure, but medical fallout for years to come – as would any country that experiences such a disaster, double the trouble here in the US where the nuclear industry is entirely subsidised by the public.



Trade policy remains moored in oppressive tactics – China now seems no more or less menacing a partner - the US emperor is naked but no one in Murdoch world notices. The kooky US left believes marching in DC will affect change? It’s pathetic. The crisis for capitalism will happen when China’s working class revolts. If that doesn’t happen, China will become what the US is today, as the US simultaneously bottoms out. I prefer the death blow to capitalism inflicted by a worker revolution but history is not a promising indicator.

" Hmmm...national 'trade policy'? Or is it the regulatory cartelisation of the global economy by state capitalist policies of the wealthy nations?

It’s the Political Economy, Stupid!

Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough.

But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.

This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.

The rapid and robust global restoration of profits post-2008 was not an accident. Public funds were used to bail out exposed creditors and shore up asset values, while the crisis was used to suppress wages and postpone meaningful regulatory reform. Indeed, I can predict with some confidence that many of the profits, particularly in the financial sector, that have been reported in official filings and blessed by the accounting firms will later be found to be illusory—but not before those who have claims on the revenues have cashed in to their own personal advantage. The institutions will be decimated, but those who owned, lent to or bet on them will be rich. This is not a failure, at least not for them.

You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic. Neither appears to be the case today. From what we (you and me) can see from our vantage point, the ruling demands are to make sure my bonds are serviced, my counterparties pony up, the markets I invest in stay liquid, and expenditures for public welfare (i.e. the losers and chiselers) are slashed.

The first principle of political economy is that the scope of democracy depends on the range of views and interests (typically tightly linked) of the owning and controlling class. Genuine public debate and decision-making extends only to those issues on which the elites are divided. In what country today is there a significant division among political-economic elites over core economic questions? How would our situation be different if Obama, Cameron, Merkel, Sarkozy et al. had been on the losing side of their elections?

So, the current mess is not the result of a failure by intellectuals—although clearer, less ideologically-driven thinking by economists would certainly be a good thing and might make a small dent at the margin. As long as there are even a few economists who proclaim the virtues of austerity and deregulation, however, their views will dominate. They haven’t won a battle of ideas; they are simply the ones who have been handed the microphone.

The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy.

A Calamitous Response to Calamity

I grew up 18 miles from Youngstown, Ohio, the nearest thing to a "big city." The town was the epicenter of the Rust Belt because of his heavy dependence on steel. As the economy disintegrated, arson became the major industry because housing values had declined so much. Recently, the town was in the news because it pioneered in the deliberate shrinkage of a city.



Now, the Wall Street Journal reports that a new steel mill is under construction, which might seem to be a reason for celebration. Unfortunately, the purpose of the mill is to produce million tons of seamless steel tubes used in "fracking," which has become a major source of income in the area, but a serious threat to the water supply.



Ansberry, Clare. 2011. "A Steel Plant Rises in Ohio." Wall Street Journal (2 August): p. B 1.

http://online.wsj.com/article/SB10001424053111904233404576462562705511704.html?mod=ITP_marketplace_0

Manufacturing Discontent: A Prelude to the Phony Debt Crisis

I just posted a short video clip discussing my 2005 book, Manufacturing Discontent and its relevance to the phony debt crisis.

http://www.youtube.com/watch?v=tmYWMV-PJ-M

Unions vs. the Good Guys at Delta Airlines

The FAA was shut down because of a partisan dispute. The basic issue was supposed to be the Republican demand that the agency save $16 million by ceasing to subsidize 13 airports with relatively little demand. Yes, the airports were in Democratic strongholds.

NPR's Brian Naylor reported that the airports were a bargaining chip. The real issue was the threat that union power posed for Delta. The National Mediation Board rejected a practice that counted required a union to win more than half the eligible votes rather than half of the votes cast.

Delta, the only non-union airline, got the Republican bill to include language overturning the National Mediation Board decision. Since the House leadership refused to budge, the FAA shut down, leaving the government unable to collect $30 million per day in taxes. Patriotically, most of the airlines continued to collect the tax in the form of higher fares. However, these "job creators" kept the money so that they could help the economy. Besides, the government could make up the lost taxes with still more tax cuts.

This brings us back to Delta, which graciously agreed to refund the "taxes" that it collected. Hopefully, we will reward Delta for this good behavior by supporting the House repeal of the union election rule.

The Tea Party Destroys The "Full Faith And Credit" Of The United States

No, in the end they did not actually block a debt ceiling increase, so we avoided a formal default, and the ratings agencies may even yet let us off the hook for an official downgrade. But that does not matter. Since our one-only-in-the-world debt ceiling was unified in 1939, it has had 89 "clean" increases up until this year, despite some noise and huffing on some, and even a delay in 1979 great enough to cost taxpayers something like $10 billion due to a one month technical delay in paying $120 million in interest.

But now we are in a new world. The master of this increase, Sen. Mitch McConnell (R-KY), has made it clear that this is the "new normal." There will be no clean increases in the future, and the tea party has made it clear that Grover Norquist is our dictator; there will be no tax increases to help in meeting the demands to reduce deficits, even though these efforts look to push us back into another recession, 1937-style, all over again. Chinese and other foreign commentators have gotten the message, just as did Moody's, that there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress, with the worst of this driven by maniacs who refuse to increase taxes and some of whom even think that a default would actually improve the credit rating of the US. The only thing that could have been worse out of this mess would have been if in fact they had failed to raise the damned debt ceiling.

As it is, the New York Times has a lead editorial this morning calling for the abolition of the debt ceiling, a position I have been pushing here since April 19.

The Choices of 2008, the Consequences for Today (Caution: Very Dark)

It’s always a good idea to try to see the present as a moment in history, in relation to the main forces at work.  By now it can no longer be denied that the US and European, and therefore world, economies are in serious trouble.  We are awash in analyses that examine at close distance the various aspects of our predicament: beleaguered US consumers, sovereign European borrowers who can’t keep treading water as their interest rates rise, and misguided politicians and policy chieftains on both continents who provide half measures at best on top of perversely procyclical fiscal and monetary blunders.  All this is true.

But let’s go back to the critical moment in the fall of 2008 when global markets froze and, in the midst of crisis, decisions had to be made about fundamental economic strategy.


The runup to the crisis was, in broad terms, marked by several developments:

US households had substituted debt for income, borrowing through every available channel and particularly against their increasingly fictitious housing equity.

• Global imbalances reached stratospheric proportions, with housing bubbles, directly or indirectly inflated by capital inflows, becoming the vehicles of choice for financing surplus expenditures in deficit countries, including peripheral Europe.
  
• The exposure of financial institutions to real estate price volatility was both amplified and concealed by a hyper-complex pyramid of derivative instruments, facilitated by reckless deregulation.
  
• There was massive malfeasance on the part of financial market participants and rating agencies in this process—although such malfeasance may be the norm in this arena, invisible in good times and coming to light only when prices collapse.

All of this came to a head in 2007 and culminated in the post-Lehman meltdown. At this point, policymakers had to act quickly. They faced several choices:

1. They could organize a massive debt writeoff to bring the financial system to health as quickly and thoroughly as possible.  This would involve letting insolvent lenders fail, replacing them on either an interim or long-term basis with public banks—the so-called “good new bank” idea.  Borrowers would have their principle reduced to a manageable level, freeing them from excessive servicing burdens.  Vigorous countercyclical measures would safeguard household incomes and restore demand.  Over the medium term, the sources of income-expenditure imbalances could be systematically addressed.  This was by far the preferred option, although it was also the most radical and posed high short-run risks.

2. They could put private financial institutions under temporary public control.  Investigators would go through their assets, sequestering those that had little value in a “bad new bank” and recapitalizing to the extent needed to restore an equity cushion to support those that remained.  This would have wiped out the private owners but restored the banks to viability.  Public funds could be used to ease the terms on overstretched households, particularly in real estate markets.  As with #1, temporary fiscal and monetary stimulus would be provided to the extent required to maintain effective demand, and (although most proponents of this approach did not say this) similar medium-term measures could be taken to undo the sources of financial imbalance.  This was the second-best approach, more costly and less equitable than the first, but one that would follow a well-charted course.  Its potential risks were longer-term, having to do with the public cost of subsidizing borrowers and lenders in order to preserve as much of the existing private debt obligations as possible.

3. They could patch and hope.  Flood the markets with enough liquidity that even thoroughly insolvent financial institutions would remain in business.  Provide enough countercyclical stimulus that household bankruptcies could be kept at a level that would not threaten lenders.  Regulation and structural reform would be kept to a minimum, since the more profitable the financial sector, the more equity positions could be shored up.  This third approach hardly deserved to be called a solution, except for holders of financial wealth, and even then only in the short to medium run.

So guess which way the elites turned.  A few economists (including yours truly) advocated #1, mainstream economic opinion supported #2, but in Washington, Brussels and Frankfurt it was #3 all the way.  This was not because one side or another won a war of ideas, but because all major governments are so closely tied to the financial wealth-holding class that any other approach was out of the question.

However: #3 was not a solution.

1. It did little about the true state of banks’ balance sheets.  The financial sector may be sucking in record profits, but trillions of dollars of asset values have been effectively wiped out, and it would take too many years to erase insolvency through profits alone.  The fact is, no one really knows the state of the world’s banks except for those who run them, and they aren’t talking.  So-called stress tests are conducted with the lightest of touches, using risk profiles drawn up by the banks themselves so as not to have to actually open the books.  There is still no transparency about CDS’s and other derivatives.  The agonizing over whether a Greek debt swap that lenders could accept or reject constituted a “default” and would therefore trigger doomsday claims on the derivatives market was half-farce, half-nightmare.

2. It did little about the state of household balance sheets.  Particularly in the US, where the lethal combination of extreme inequality and massive current account deficits (and a corresponding shortfall of aggregate earned income) put a substantial proportion of the population in near debt-peonage, consumer expenditures have collapsed.

3. It was an enormous drain on the public fisc.  The fact that the majority of the financial sector bailouts have been back-door (e.g. AIG, Greek bonds) does not mean that they have been small potatoes.  The deficit countries whose institutions were most at risk and needed the most cash to prop themselves up are also the ones that have run up the largest sovereign debt loads.  Hyperventilating Republicans to the contrary, the US is in the fortunate position of supplying the world’s reserve currency, so it still has considerable fiscal space to play in.  (It is true that this space is not without limits, of course, and the cost of a second, deeper dip will give us a chance to see how close we are to them.)  Not so the peripheral Europeans, who must cope with the monetary union and fiscal fragmentation of the Eurozone.  They have already bailed beyond their means, and the Eurocrats must now figure out how to convince their publics to accept cross-border transfers in order to keep the bailouts of core banks flowing.

So here we are.  We are on the brink of second, perilous dip into the wild eddies of the Great Recession.  Financial institutions in the US and Europe remain exposed, but we don’t know how much.  Our leaders have been so dishonest about the choices they have made, the reasons for those choices, and the costs they have passed on to us, that they have been reduced to pure gibberish.  (“The recovery is on course.”  “The banks are closely regulated and no longer at risk.”  “Austerity will restore growth.”)

I wish Marx were right, that our governments could have the competence and vision to serve as executive committees of the ruling class.  Maybe they did that once.  But today the class that occupies the driver’s seat is diffuse and has little in common other than a desire to earn the highest rate of risk-adjusted return on its portfolio.  They speak dozens of languages, pray to many gods or none at all, hold all sorts of political views and know only a handful of their peers.  There is no guiding hand or collective wisdom, just the demand to keep the cash flow flowing.

I predict it will flow until it stops, when the last short-term palliative has been exhausted.  Even more, I am worried about the political reaction if economic conditions continue to deteriorate.