This may get ugly -

This may get ugly

A double-dip recession is looming and there are no easy fixes for a debt-soaked global economy

This may get ugly

Benjamin Norman/The New York Times/Redux

If President Barack Obama was trying to put an end to the carnage in global stock markets with his speech to the nation on Monday afternoon, he failed. Far from instilling calm after Standard & Poor’s downgraded his country’s credit rating, as he spoke the pace of the market rout picked up speed, contributing to investor losses totalling more than US$1 trillion during that one day alone. Even so, Obama’s speech served as a useful yardstick for how deep in hock the U.S. has sunk. In the brief eight minutes and 19 seconds Obama took to tell the world that “no matter what some agency will say, we’ve always been and always will be a Triple-A country,” another US$12.5 million rolled over on the relentlessly escalating U.S. debt clock.

The unprecedented downgrade of America’s credit rating from AAA to AA+, on par with Belgium—a country that’s been without a government for 420 days—was just one of several extreme shocks the global economy has suffered in recent weeks. It’s not that investors believe America might not eventually repay the staggering US$14.6 trillion it owes lenders. After all, as markets burned, it was to U.S. Treasuries that investors fled for safety. Rather, it’s that the downgrade comes even as the world’s biggest and most important economy has shown worrying signs it is headed for a double-dip recession.

Now here’s the scary part. If the U.S., European and even Chinese economies slide backwards, experts say there is almost nothing policy makers can easily do to revive growth this time around. After the crisis in 2008, governments and central bankers turned on the taps, pumping an estimated US$4.9 trillion in fiscal and monetary stimulus into the global economy. However, the governments that sailed to the rescue of automakers, banks and investors last time are crumbling under the debt they took on. Meanwhile, the U.S. Federal Reserve has already cut interest rates to virtually zero, and its mammoth quantitative easing program failed to get companies hiring again.

Canada won’t be immune, either. Though we dodged the worst of the 2008 financial crisis and ensuing recession, there are no guarantees of a repeat performance. The country’s economic fortunes remain tied to those of the U.S., our biggest trading partner. There is also mounting evidence that China’s cooling economy, coupled with the European debt crisis, will bring an end to the commodity boom that helped rescue Canada last time. Nor can the housing market, which appears ripe for a correction, guarantee us another get-out-of-jail free card, especially since Canadian households drove their own debt to record levels these last few years and consumers’ balance sheets are in perilous shape.

Last week’s market rout suggests investors have finally woken up to the fact that the root causes of the 2008 crisis never really went away. In short, the world has too much debt. But instead of dealing with that, the goal of policy makers over the past 2½ years has been a return to the carefree growth enjoyed since the 1980s—growth that was driven by ever-increasing home-ownership rates, a booming finance and investment sector and the pervasive belief that it’s okay to use your home like an ATM machine if it means getting that 52-inch wide-screen TV immediately.

Now those bills are coming due, says Gary Shilling, author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, and the world finds itself mired in a long and painful process to unwind all that debt. “With the rally in stocks and commodities, most people thought we were going back to the good old days we knew and loved, and that 2008 was just a bad dream,” he says. “But that was just a bear market rally, and now we’re going back to reality. There is just no such thing as an easy fix in an age of deleveraging.”

Economic indicators are not limited to hard numbers or statistics, and the revival in popularity of Brokers With Hands On Their Faces Blog—a website which, as the name suggests, posts images of horrified traders rubbing their eyes or covering their mouths in astonishment; it captures perfectly the waves of fear infecting markets.

There has been no shortage of recent fodder for the blog. On Monday, Aug. 8, the Dow Jones Industrial Average plunged 633.78 points, the largest single-day loss since 2008 and the sixth-biggest decline in Dow history. As it is, stocks have lost more than 15 per cent of their value since the third week of July, the equivalent of about US$4.3 trillion in destroyed wealth. North American stocks finally lifted off the floor on Tuesday, but even so the VIX fear index, which measures market volatility, remained worryingly high. It has soared 200 per cent over the past month.

It’s no surprise, then, that investor psyches are fragile. The scars from the last crisis had yet to heal, with markets still well below their pre-recession peaks even before the crash. That means the wealth effect is more important than ever. When people feel richer, such as when the value of their stocks and homes go up, they spend more. When those assets fall in value, consumers freeze. “If the market does not come back in the next few weeks and these losses continue, the economy will suffer,” says Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, N.J. “Households have been devastated by the loss of wealth and since consumers make up 70 per cent of economic activity, the U.S. economy, which is already quite fragile, would be teetering on the edge of recession.”

It’s by no means certain America will slip into another recession, says Baumohl. A recession is defined as two consecutive quarters of negative growth, and in the first half of 2011, the U.S. economy eked out growth of 0.4 per cent and 1.3 per cent. Baumohl also points to other positive data, such as an increase in small vehicle sales, consumer spending and the fact that corporate sales are robust.

Even so, in the eyes of many, the odds of the U.S. suffering a double-dip recession are rising. Goldman Sachs, the giant investment bank, says the chance of recession is 33 per cent. Martin Feldstein, the Harvard economist and member of the National Bureau of Economic Research committee tasked with officially dating the start and finish of recessions, says it’s more like 50/50. As for Shilling, he pegs the odds of another recession at 60 per cent and believes it will be triggered by a further 25 per cent drop in house prices.

The U.S. economy is in a far more precarious position than it was before the credit crunch of 2008. Unemployment remains alarmingly high, at 9.1 per cent. The average time it takes for Americans to find new jobs has spiked to 40.4 weeks, the longest duration since records were first kept in the 1940s. It turns out the recession was also deeper than first thought. At the end of July, the U.S. Commerce Department revised down growth data, showing the U.S. not only shrank more than earlier believed, but economic output has yet to reach pre-recession levels.

Many state and local governments in America are also showing serious signs of stress. Just days before S&P downgraded Uncle Sam’s debt in Washington, seven hours up the coast in Rhode Island, the tiny city of Central Falls (population 19,000) defaulted on its debt after municipal budget-cutting negotiations failed. On Wednesday, Jefferson County in Alabama was also expected to file for bankruptcy, which would make it the largest municipal bankruptcy in U.S. history.

For all that, the greatest risk to America’s economy today remains the stagnation in Washington. Relations between the Tea Party and Obama are toxic, and if the U.S. does experience a double-dip, it is widely agreed that it will have been mostly self-inflicted. Not only did Congress fail to reach a debt limit deal that would have maintained spending in the short term and laid out a clear, long-term path to fix America’s balance sheet, but the acrimonious debate and the lackluster deal politicians finally agreed to suggest Washington will be paralyzed in the face of a recessionary threat. “There are tools to fight it, but it’s a question of whether there’s an appetite to do it,” says Sherry Cooper, chief economist for BMO Capital Markets.

At issue is the question of whether America should immediately tackle its trillion-dollar annual deficits, and begin to chip away at its debt load, or delay austerity until the economy improves. For a country to unwind its debt, or to deleverage, it must cut spending or raise taxes, or both—all of which drag on the economy. Yet unchecked, the debt can become so large that lenders and investors eventually lose faith in the country’s ability to repay it, potentially leading to a sovereign debt crisis. To avoid that, an economy must either grow fast enough so that its debt shrinks on a relative basis, or take the painful steps to reduce it and risk slowing the economy. These are the hard choices America now faces.

Lurking in the background are warnings that America’s move toward austerity bears a striking resemblance to the country’s experience in the 1930s. Most people assume that decade was one long depression, but it occurred in two stages. The Great Depression lasted from 1929 to 1933, followed by a period of economic growth and a robust stock market rally over two years. In 1937, President Franklin D. Roosevelt, under pressure to cut spending, enacted austerity measures that some argue tipped the U.S. into a second year-long recession.

With politicians in Washington deadlocked today, the task of resurrecting an ailing U.S. economy would normally fall to the Federal Reserve, which sets monetary policy. But unlike 2007, when the Federal Funds Rate was a relatively lofty 5.25 per cent, short-term rates in the U.S., at 0.25 per cent, are already as low as they get (the Fed promised this week to keep the federal funds rate “exceptionally low” until at least mid-2013). And two rounds of massive quantitative easing, where the central bank bought government bonds to drive down borrowing costs for individuals and businesses, have done little to spur economic activity, beyond driving up stock prices.

As if the U.S. didn’t have enough problems already, policy makers must also track events in Europe. In late July, just days after European leaders congratulated themselves on a new US$155-billion rescue package for Greece, panic abruptly shifted to Italy and Spain—nations considered both too big to fail, yet too big to bail—driving up their borrowing costs to 14-year highs. The development sent shockwaves through the markets and caught European leaders off guard. Uri Dadush, with the Carnegie Endowment for International Peace, has suggested the combined bailout costs for the two deeply-indebted nations would total US$2.1 trillion, dwarfing the problems posed by tiny Greece. Were Italy to collapse under the weight of borrowing costs, Dadush told the New York Times it would be a “Lehman-type situation,” referring to the investment bank which failed in 2008 and led to the collapse of global credit markets. The European Central Bank has since launched a campaign to buy up the countries’ bonds, but resentment over the bailouts is growing in Germany, while austerity measures threaten to crush the economies of southern Europe.

China, another of the world’s key economic engines, is a source of concern, too. When the crisis hit and American consumers stopped buying Chinese exports, Beijing instituted a huge US$620-billion spending program. The measures unleashed an orgy of construction projects across the country, but also sparked what has been described as history’s largest housing bubble, while driving up prices for consumers. “They’ve already had to introduce a big stimulus package a couple of years ago, so it’s going to make it harder to go back to the same playbook again,” Brian Jackson, economist at Royal Bank of Canada in Hong Kong, told the Wall Street Journal.

Even without a U.S. recession, China’s economy could be headed for a hard landing, says Shilling, who believes officials in Beijing will botch efforts to moderate growth. To that end he’s betting that a bubble in commodity prices is about to burst. Over the past three months, prices for oil, copper and cotton have slumped, and while commodity bulls insist the drop is temporary, Shilling believes it signals something worse. “It’s like those old cartoons where Wile E. Coyote runs off the cliff and for a moment he’s standing on air,” he says. “Then he realizes there’s no ground beneath him and—wham.”

If that happens, Canada’s resource-dependent economy and stock market better watch out below.

Canadian investors have already had a taste of what the Great Recession, Part Two might feel like. Earlier this week, the closely watched S&P/TSX composite index suffered its biggest drop since March 2009, as investors reacted to falling stock and commodity prices elsewhere in the world and renewed concerns that the recovery in the U.S, which buys three-quarters of Canada’s exports, might be on its last legs. The fact that Canada’s GDP unexpectedly contracted by 0.3 per cent in May didn’t help either. “If the U.S. economy goes into recession, there’s a great chance that we will too,” says BMO’s Cooper. “We’re unlikely to be hurt as bad as the economies in Europe or the U.S. But with the declines in oil prices and our stock market, and if we do continue to see our trade with the U.S. and Europe deteriorate, then the Canadian economy is also at risk.”

While Finance Minister Jim Flaherty has stressed that the country is “well-positioned to face global headwinds,” some observers caution Ottawa against being complacent. “The recovery thus far in Canada was, to a large extent, relatively better than other countries, and that’s because of commodity prices and a hot housing market,” says David Madani, an economist with Capital Economics. This time around, though, there are concerns that China’s cooling economy and a drop in raw material prices would have a big impact on Canada. Already there is talk in Alberta about the possibility of big oil sands investments being shelved if oil prices stay below US$85 a barrel.

At the same time, Canada’s unstoppable housing market, which almost single-handedly pulled the country through the 2009 recession, now looks more like a millstone hanging around our neck. During a June speech in Vancouver, Bank of Canada governor Mark Carney suggested the rush among Canadians to take advantage of rock-bottom interest rates to buy homes has not only ruined the balance sheets of many households, but has actually impeded growth by diverting resources from other parts of the economy. He also reiterated his warnings about soaring debt-to-income ratios and said the number of Canadian households vulnerable to an economic shock has reached a nine-year high.

Canada’s real estate market creates a particular conundrum for Carney. With the U.S. holding rates low for the next few years, Carney will have a tough time raising rates and may even be forced to cut them again if a double-dip recession comes to pass, throwing even more fuel onto the real estate market. Madani, for one, believes that a major correction in the housing market is long overdue. He has predicted a 25 per cent price drop over the next several years in some markets. Others see everything from flat prices to a 10 per cent or 15 per cent drop. “If we’re right and we see housing go into a slump, then it could hit the economy fairly hard too,” Madani says, adding that an external shock like falling commodity prices could be what ultimately tips things over the edge. Or he says it might just “fall over” by itself if Canadians, spooked by more bad news out of the U.S. and Europe, simply lose confidence.

Whether it’s Canada, the U.S., Europe or even China, the underlying debt problem will make it nearly impossible for policy makers to find a quick and easy solution if another recession occurs. “There is no magic bullet,” says Shilling. In fact, the Harvard University economist Kenneth Rogoff, co-author of the book This Time Is Different: Eight Centuries of Financial Folly, has argued America hasn’t suffered from a traditional business cycle recession at all. Instead the world is caught in the grips of what he calls the second Great Contraction (the Great Depression was the first). The answer, he says, is a sustained period of high inflation, which would erode the value of debt, at the expense of lenders, and bring the global financial system back into balance. Such a policy is anathema to central bankers and politicians wary about rising prices.

In the meantime, the world continues to hold its breath that a double-dip is averted. The green shoots that pushed their way up through the scorched landscape of the last recession failed to ever fully bloom. The question now is whether politicians can even do anything to save them, or whether they will simply wither and die.


This may get ugly

  1. Addressing the global debt crisis is tricky – sharp cuts may reduce deficits, but can also have a depressive effect on the economy. Normally I would say that this is just short-term pain, but it isn’t clear that this is the case. The credit system is fragile, and our central banks have no slack to ease the pain of austerity. Much of the world is already well below potential GDP. Exchange rate adjustments are also not feasible, because this is a global problem, as opposed to one impacting just a few countries.

    We need to reevaluate – but not destroy – the welfare state. The job of government should be to provide public goods (ie. the benefits are non-excludable, and the consumption by one person does not reduce the ability of another to consume the same good) that cannot be produced by the market at sufficient levels. Much of government activity exceeds this role, redistributing private goodies for political gain. 

    Take, for instance, mortgage interest deductibility in the US (tax deductions are just subsidies for rich people). Its not distributively just (I don’t consider distribution a priority, but I’m sure some of you do) – it primarily benefits wealthy people. There are no positive spillover effects – it benefits homeowners themselves. In face it may encourage people to make poor and risky decisions, like prolonging a mortgage as a tax writeoff, instead of paying it off ASAP. And before lefties start crowing, I think old age pensions also fall into the same category.

    We also have to restructure the tax system, in a way that provides more revenue, but less of a drag on growth. Increasingly we should tax “bads” – smoking, alcohol, junk food, sales, and inheritance instead of socially beneficial things like corporate profits (much of which is funneled toward R&D or new plant construction) or personal income. 

    Of course the pattern of these kinds of policies is political. Politicians have short time horizons, roughly corresponding to a term in office. Those that ignore elections tend to lose them. They may also have parochial regional purviews – caring more about a few strategically important voters (either those in swing districts, or well-heeled donors) than they do about the rest of us. Ironically enough, less democratic accountability – longer terms in office, no term limits, etc. – may enable politicians to credibly deal with long-term problems.

    And we have to stop living in the fiction of a “consumer-based economy”. There is no such thing. If you were on a desert island, simply wishing for a boat wouldn’t create one. The illusion of a demand-driven economy persists solely because we think in the short term. In the long term, our ability to consume goods hinges on the productive capacity of the economy. Productivity, in turn, depends upon R&D, and capital accumulation (which requires that we save, not spend). 

    We also need to batten down the hatches against the many private forces that push people towards profligate spending. Take, for instance, FICO. They are a private corporation with an algorithm determining credit-worthiness. However, the algorithm doesn’t include such basic information as income or net worth. And the pervasiveness of credit scores force people to opt into a cycle of borrowing. Even if you want to rent an apartment or find a job, your credit score can be used to deny you access to these things. 

    Finally, we need an economy capable of getting capital to good entrepreneurs. However, we also need to be more discriminating because if you’ve noticed, we have a knack for generating bubbles that ultimately pop. IT, housing, and probably now resources are only the most high-profile examples (higher education and solar power are some others). That takes smart, prudential financial regulation – not kneejerk reaction. For instance, evidence suggests that large banks are less prone to collapse and easier to monitor than small ones. Yet many in the US are pushing for small unit banks in the wake of the 2008 financial crisis. 

    In other words, we need a root and branch overhaul of our political, economic, financial and social systems motivated by efficiency, not ideology. I’m not normally a praying man, but if you’re up there save us, Superman.

    • Simply wishing for a boat wouldn’t create one, no. But without demand, nobody would bother building one either.  In the long-term, our ability to consume goods has no relation to the productive capacity of the economy. We will always have that ability. What changes is whether that ability is exercised and fulfilled.

      Productivity simply does not increase unless there is demand to take up the goods or services produced. If there is not, then what is increased is *waste*.

      So no, we don’t have to stop living in a fiction of a “consumer-based economy” rather we have to start realizing that we *do* live in a consumer based economy, and as such, start providing the incentives that increase *demand*, rather than (as we’ve done this past time around) trying to increase supply and hoping that demand rises up to meet it. It’s important to remember that wealth is a short way of saying that more of people’s needs being met.

      When we give the banks super low interest rates, we’re not creating wealth, we’re creating debt.  People create the wealth but when they can only do so through debt, the banks end up siphoning off and concentrating that created wealth into the hands of the few who, and this is key, don’t need it.  Because they don’t need it, there’s not a significant amount of new demand that can hit the marketplace, and so businesses continue to fail.

      If, instead, we realized we actually *do* live in a consumer based economy and instead of letting the banks borrow at super-low rates, keep them at higher rates but ensure that the bottom end of the social strata has enough money to meet their needs then banks would be more careful about lending, but demand being higher would enable those businesses meeting people’s needs to see profits regardless.  The difference being that rather than people borrowing for things that are unlikely to create wealth, borrowing (because of the higher risk) would be restricted to things that show the greatest potential to generate wealth/meet people’s needs.

      Basically, your point about needing to be more discriminating about entrepreneurs is a symptom of our supply driven economy. We’ve got more money at the top end than we know what to do with, so we end up giving it to folks who are making businesses that have no demand, rather than giving it to folks who have unmet demands so that they can afford to meet those and in the process create increased employment and wealth.

      • Increasing demand without increasing productive capacity is a losing proposition. We’ve essentially reduced our productive capacity these past few decades by outsourcing it, believing that the thriving housing, service and financial sectors would pick up the slack. That failed spectacularly. Canada has been less affected than most due to our resource economy. Ironically, the biggest knock on Canada – that we are too resource dependent – was our saving grace. 

        Demand will not pick up again until debts are reduced and incomes are increased. I’m not sure how we can do this. But simply increasing demand through some sort of wealth redistribution without first addressing the perverse incentives created by ultra-low interest rates is a non-starter. Raising interest rates considerably would stall the economy for now, but might be just what we need over the long term. Keeping them this low simply rewards debtors and punishes savers, which is in large part what created the current morass. 

      • “In the long-term, our ability to consume goods has no relation to the productive capacity of the economy. We will always have that ability.”

        This is not a well-informed statement about economic history. Productivity growth is a variable. Productivity growth was essentially zero prior to the Industrial Revolution. It was rapid in the golden age of growth, and slow between the 70’s and the mid-90’s. 

        When you think about what drives productivity, this becomes much clearer. In the medium run, we can increase productivity by working more (which has its limits – there are only 24 hours in the day), or by adding more machinery. However, absent innovation, capital accumulation experiences diminishing returns to scale. Think about it – doubling the size and machinery of every factory in the country might increase productivity per worker. Doubling it again would too, but probably by a lot less. 

        “we have to start… providing the incentives that increase *demand*”

        What planet are you on? Every major economy is running a large deficit. The personal savings rate in the US and Canada is hovering close to zero, and well below historic rates (like say, the high savings rates that characterized the golden age of growth between 1945 and 1973). If demand were king, we’d be in the money.

        “If, instead, we realized we actually *do* live in a consumer based economy and instead of letting the banks borrow at super-low rates, keep them at higher rates but ensure that the bottom end of the social strata has enough money to meet their needs then banks would be more careful about lending, but demand being higher would enable those businesses meeting people’s needs to see profits regardless.”

        First, which strata of the economy is the most deeply in debt? The poorest strata, obviously. Yet you propose increasing interest rates as a means of helping the poor in particular spend more money? How would increasing the costs of servicing debt help people who are in many cases already in debt? 

        Second, since when has increasing interest rates been a bonanza for demand, or the economy in general? What happened in Canada in the early 90’s, when John Crow went on his zero inflation crusade and raised the bank rate to 14%? The result was double-digit unemployment. 

        But this is an even worse idea when you have a fragile credit system, because it threatens the solvency of the banking system. After the 1929 Stock Market crash, the Federal reserve raised interest rates, prioritizing the US exchange rate over the domestic economy. We all know how that went. 

        I suspect that your post was motivated by shadow-boxing with supply-side economics (which I have not advocated – I called for prudential regulation, for instance). I’m really just abstracting from growth theory here.

        • You’re correct in that last paragraph, however your “abstracting from growth theory” is the exact kind of logic that bolsters supply-side arguments.

          So it’s not exactly shadow-boxing, but more like preventative measures.

          Incidentally, the strata that is most deeply in debt isn’t the lowest.. they generally don’t *have* credit in the first place. What they have are unmet needs — something which can translate into demand.

          It seems part of the problem we’re having is that you think that debt equates to demand. However, greed is not demand. When you couple that with the knowledge that most of the debt held in this country is held not to satisfy needs but rather for investment purposes, then you realize there is no actual demand underneath it, simply waste. This is the problem we’re having and why I suggest interest rates need to be raised.

          Will this cause pain as people lose their investments? Damn straight. Do you really think there’s any way out of this without pain? The trick is to make sure that despite this pain, people have the resources required to meet their actual needs. So that we can see what real demand is in our society, and so have production develop appropriately.

          Will this cause the collapse of wealthy financiers? God willing..

          • “Incidentally, the strata that is most deeply in debt isn’t the lowest.”
            Uh… no, but thanks for coming out:
            Access to credit has little to do with income or net worth, and a great deal more to do with your paper trail. As a creditless individual myself, I know this all too well.

            High interest rates will not deter poor people from taking on debt. For those with existing debt, it will make their finances even more dire, and for those without there are powerful forces likely to push them to outspend their incomes. 

            One is hunger, obviously. However, FICO is also a very big one. They use credit scores to determine eligibility for apartments and for jobs. In the case of other basic services, you need a deposit in lieu of a good credit rating – because of course poor people have oodles of money lying around. If you really want to tilt at the financial parasites, you need to regulate the use of credit scores, which is programming us to be spenders. 

            “Will this cause the collapse of wealthy financiers? God willing..”

            I’m guessing you haven’t thought through the degree to which financial system – pernicious as it might be – is an essential feature of any economy. We need to keep finance out of politics, to stop subsidizing financial risk-taking, and to regulate banks. Doing so won’t bring about the end of finance-led capitalism (and let me stress again that I agree that it is a problem that our economy is led by investment bankers instead of entrepreneurs) overnight, but it will do the job without an economic catastrophe. 

  2. How about an alien invasion?

    • Keynesians would agree, since they seem to believe that WWII ended the Great Depression. (Perhaps the most damaging economic myth in existence.) An all out war against an alien menace would be a dream-come-true Keynesian stimulus for the likes of Krugman. 

      • I think it’s more the Neoconservatives who stick to the claim that WWII military spending ended the Great Depression.  Keynesians would claim that a combination of the New Deal, WWII and several other factors brought the GD to a close faster than the markets would have by themselves.

        The Great Depression was a fairly simple event, economically speaking, which is why it’s both a textbook case for Keynesians and Keynes deniers.  There wasn’t a lot involved beyond a shortage of credit & cash hording.  There wasn’t the diminished domestic productive capacity and wage base (and therefore demand) due to offshoring of productive capacity, and pre-WWII debt levels were pretty minimal.  You didn’t have a banking system that skims 2-3% of revenue off of small-to-medium businesses.

        I’m kind of leaning towards the opinion that we’ve twisted our financial shorts into such a Gordian Knot that no economic theory will explain them.  When we have people talking about how stock markets produce or lose billions of dollars of value based on events that nobody can pin down but don’t have anything to do with supply, demand or cash flow, I start to wonder “WTF???”  As to the people who created this mess, if you give MBA’s to a bunch of monkeys and sheep, you just end up with monkeys & sheep with MBA’s (MBaaaaa’s??) & the occassional highly educated con artist.)

        • I would point out that Keynesian poster-boy Paul Krugman is one of the most adamant promoters of the “WWII ended the Great Depression” theme. 

          I like your last paragraph. Our financial system has become a cancerous tumour,. one that we haven’t even begun to excise yet. Policy-makers’ reaction to the 2008 crash was, everywhere, to preserve the status quo at all costs. As Taleb, Schiff, Celente, Celente, Ron Paul and other contrarians point out, the status quo IS the problem. (And those guys are from across the ideological spectrum.) 
          Your comment on MBAs is another good one. When you look at just how thoroughly the Yalies, Harvardites and Princetonites, serving at the highest levels in both Washington and on Wall Street, drove the once-mighty US economy into the ground, you start to wonder whether MBA school isn’t the biggest scam going. 

  3. The answer, he says, is a sustained period of high inflation, which would erode the value of debt, at the expense of lenders, and bring the global financial system back into balance. Such a policy is anathema to central bankers and politicians wary about rising prices.
    That’s got to be the dumbest statement I’ve ever read. Central bankers printed their way into massive inflationary bubbles in both the stock market and the real estate market. And along comes this clown who says that inflation is “anathema to central bankers??” The LAST thing we need is more of the same inflationary loose money policies that created this mess in the first place.  

  4. Bank of Canada governor Mark Carney suggested the rush among Canadians to take advantage of rock-bottom interest rates to buy homes has not only ruined the balance sheets of many households, but has actually impeded growth by diverting resources from other parts of the economy. 
    That’s precisely what John Crow would have said. Only John Crow would have acted long before now to prevent this perversion of investment flows from taking place. He’d have us in recession right now, but at least we’d be dealing with the structural issues facing the economy, instead of pretending there was a quick and easy way back to growth. Paul Volcker understood this in the early 1980s when he created a severe recession to bring inflation under control. Crow did the same thing in Canada in the early 90s. I do not see a single central banker the world over willing to make those same tough decisions today. So we’ll keep overdosing on easy credit and keep pretending that stock market or real estate bubbles represent real wealth.

  5. Well we’ve had 2½ years to sort this out….a far longer window than I thought we’d have…and yet we didn’t do anything.  Instead it was right back to ‘business as usual’.

    So if people refuse to heed warnings, then I guess we get the crash.

    • And it will be huge. The hot air central banks are pumping out in a desperate bid to re-inflate the stock and housing markets will just cause a bigger blowout a few years down the road. Or maybe tomorrow.

      • Yeah, it’s not looking at all good is it…

        Sarky and Merkel announced a deal tonight, and it’s being shot down by the opening Asian markets.

        Big changes coming…at least I hope to hell so