Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.
The US could end up running a deficit of more than 10 per cent of gross domestic product this year (adding the cost of the stimulus package to the Congressional Budget Office’s optimistic 8.3 per cent forecast). Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.
There is a better way to go but it is in the opposite direction. The aim must be not to increase debt but to reduce it. Two things must happen. First, banks that are de facto insolvent need to be restructured ”“ a word that is preferable to the old-fashioned “nationalisation”….
The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities.
[i]First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned “nationalisation .[/i]
Howse about an even more old-fashioned word? Liquidation.
The long and short of it is this: we are part way into a balance-sheet adjustment. The more common inventory-adjustment recession is one thing, but balance-sheet adjustments (1929, 1893, 1873, 1837 and 1784 to highlight those in American history) are typically called ‘depressions,’ and a most definitely another creature entirely.
Periods of balance-sheet adjustment are highly deflationary, and they continue until all the bad debt and malinvestments are washed out of the economy. All of them. The longer you try to prevent liquidation, the longer the grief continues — ask the Japanese, for whom it has now been 19 years — and the more the recovery is delayed.
The real problems in balance-sheet adjustments are always caused by two elements: massive debt and very easy money.
Why, therefore, does anyone actually believe that having government incur massive debt in order to provide very easy money … is the [i]solution[/i] to the very balance-sheet adjustment they caused in the first place? See: Einstein’s definition of insanity.
This is a good article. There is no “cure” for a recession; the recession [i]is[/i] the cure. The vast increase in government spending being touted as a “cure” will simply suck more capital toward unsustainable activities that will be liquidated in their turn.
Quite the paradox, really: as inflation and deficit spending are used to bribe and lavish voters, they are simultaneously the two most anti-democratic, anti-egalitarian devices wielded by government.