Wednesday, June 30, 2010

The Third Depression

I'm not sure how many of your caught this fascinating article by Paul Krugman about the third depression, in light of the G20 meetings of this past weekend.  It's not looking good, he says, and I would have to agree.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
There's good reason for that.  The leadership of the world has become overly concerned with inflation when the true fear should be deflation.  Every time the Federal Reserve meets to set the interest rates, I pray that they will increase interest, which will cause more people to save.  Instead, they are slashing it to record lows.
In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. 
Once again, I call on King Clinton to save us from the our deficit.  Why do we learn about history only to shun its lessons when we need them?
Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.
In short, yesterday's dip in the stock market--to below 10,000--will not likely be the last.  Nor will it be the lowest dip before this recession/depression is over.  And what does that mean to you?
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
And this is true of everyone, not just lawyers.  So, put on your thinking cap and come up with a long term plan.  It seems that we will all be needing one.



  1. I was also struck by this article. I'm sure people will come out of the woodwork to totally disagree, but arguments that we're not looking at a completely devastated economy for the long-term seem hollow.

    Couple this with the Georgetown report that the job market won't show signs of life until 2015, and all of the already horrible news on the legal front, and it's amazing that anyone still wants to take on six figures of inescapable debt.

  2. All the positive economic news rings hollow; this Krugman piece didn't surprise me much. Less respected economists have been saying this for a while. I don't know what to advise- I guess do something to earn some money, try to diversify your income, grow your own food, buy some commodities, and hope hyperinflation absolves us of our sins.

  3. It's funny that Krugman wants us to take the long view on deficits, but immediately touts the short view on bonds spreads for austerity. Why don't we check out the long view on both?

    In fact, we don't need to wait for the long view on Krugman's suggestion, because Japan has been doing it for twenty years, to no avail. Japan's national debt now exceeds 200% of GDP. The only reasons it hasn't collapsed like Greece is that it can print its own money, and the Japanese savings rate is still famously high. But now even that savings rate may not save them any longer.

    Once again, I call on King Clinton to save us from the our deficit.

    What, can he create another tech bubble?

  4. The economic problems of the US, and the world, stem from the greed of the political class.

  5. No the economic problems of the US stem from the american mindset: 'f*uck-you, I got mine so everyone else go scratch.'

  6. I'm a little confused.

    While I'm not much of a finance guy, if you (Angel) are concerned about deflation as opposed to inflation, shouldn't you *agree* with low rates?

    In general, this is what I remember:
    - low rates increases spending or maintains spending, which creates inflation.
    - high rates increase savings, decrease spending, and creates deflation.

    I'm pretty sure about this.

    As for me, I'm in the "prefers inflation" boat. So I'm also in the "keep rates low" boat.

    Though, of course, I'm also worried about jobs, and it'll be rough to have to buy a loaf of bread for 20 bucks when you have a low-paying job (or no job at all).

  7. We have a recession every 5-7 years and a Depression every 40 years. We are so right on schedule, seeing the last one was 1970s.

    Obviously the financial system is seriously screwed up that it has these flaws.

    The bottom is about to fall out. The fed has stopped printing money and the bailouts are pretty much used up. The Census is about finished and the layoffs are beginning for Census work. Unemployment benefits have run out for a lot of people. Student loan deferments are running out for people. The market is right around the Oct. 2009 lows.

    We are going to officially enter crisis mode in about a week or two, which is amazing because I have read articles back in 2008 and some even before that specifically point to July 2010. I believe that the system flaws are predictable and those that have predicted failure have done so as a result of these trends.

  8. Friendly advice from a loyal reader:

    If you are concerned with deflation, you should be in favor of low rates to counter the threat of it.

    -a finance guy.

    Otherwise, good stuff.

  9. Real wages have gone down for working class Americans over the last 35 years. Personal savings rates are ridiculously low. Consumer debt/credit cards really propped up the U.S. economy for so many years. More jobs than ever are outsourced and subject to offshoring.

    And yet, the cost of a college education keeps skyrocketing. People still believe that they can - and will - improve their station in life by taking on SERIOUS six-figure debt, in the pursuit of more academic credentials. We are dicked.

  10. Lower interest rates to increase savings? Umm, perhaps neither you nor the inimitable dwarf Krugman sees that savings rates are skyrocketing in the U.S. (from negative to over 5%, soon to be 10%) without a concomitant increase in the interest rate. Moreover, if we are not worried about inflation why would we ever advocate increasing the fed funds rate? That just doesn't make any sense.

  11. I guess I don't get it. If anyone wants to email me a lesson in deflation, I would appreciate it, but Krugman's article led me to write what I wrote... I guess I am not destined for finance.

  12. Krugman is a hack.

  13. First of all, Paul Krugman is a total imbecile. If he's so smart why isn't he rich (I mean rich on the basis of his knowledge of economics, business, and the markets)? If Bernanke's so smart, why isn't he rich? Do you see a pattern developing here?

    Others have mentioned this, but how does LOWERING interest rates cause more people to save? Are you totally brain dead? Do you save more when you can get 20% in the bank or 0.5%? If you can't answer that then you must have flunked the second grade.

    If the world had let the banksters go out of business...well, we may not be out of the woods yet, but at least we'd only have a $6 trillion national debt instead of a $15 trillion national debt.

    Please stop getting brainwashed by the New York Times and use your own f*cking head for once. And if you have any integrity you will not block this message from posting.



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