Adonis Diaries

The Lesser Depression? Who is Paul Krugman?

Posted on: July 26, 2011

The Lesser Depression? Who is Paul Krugman?

“You do not know, my son, with how little wisdom the world is governed.”

Paul Krugman published an article on July 21, 2011 in The New York Times.  Krugman is a Nobel laureate in economics and has been frequently explaining the current world financial problems.  I will exhibit a few extracts with my own editing style, and develop my comments.

“These are interesting times, in the worst way. We are currently looking at not one, but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of State fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.”

“We can only hope that the politicians, huddled in Washington and Brussels, succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.

“In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended. Why our economies are (still) so depressed.

The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been bearable if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and State and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.  So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remains near historic lows.

Yet the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe.

On Thursday, the “heads of State or governments of the euro area and the E.U. institutions” — that mouthful tells you, all by itself, how messy European governance has become — issued their big statement. It wasn’t reassuring.  For one thing, it’s hard to believe that the “Rube Goldberg statement” can really resolve the Greek crisis, let alone the wider European crisis.

But, even if it does, then what? The statement calls for sharp deficit reductions “in all countries except those under a program” to take place “by 2013 at the latest.” Since those countries “under a program” are being forced into drastic fiscal austerity, this amounts to a plan to have all of Europe slash spending at the same time. And there is nothing in the European data suggesting that the private sector will be ready to take up the slack in less than two years.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937:  The premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last, until World War II finally provided the boost the economy needed.  The European Central Bank  seems determined to make things even worse by raising interest rates.

The lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.” (End of quote)

I am wondering: What if Congress agrees to raise the ceiling of the debt?  How the US government used to pay off, in the first place, the nominal portion of its dept?  It is not through the surplus of its economic activities, or the savings of the citizens, or the slashing of military spending…

The US has been borrowing heavily by encouraging foreign State governments, which managed to save money, into purchasing US Treasury Bills and bonds.  Currently, this mechanism of relying on foreign savings is not working, and the Federal Reserve has been manufacturing money and lending it to the US government to cover short-term and urgent immediate deficit.

The dollar has been effectively being devalued consistently by 10% per year since 1945, and this rate in devaluation is increasing rapidly since 2007.

Do you realize what a deficit amounting to 14 trillion means?  It is more than the total worth of France, if sold stock, lock, and land.  Imagine thousand of years of  labor by millions of “French people” to sustaining a country, who could not accumulate enough wealth to pay off the US public deficit!

All these economic and financial decisions are meant to buy short-term leverage, before the inevitable global crisis fall on our head, very shortly.  How can the US people pay-off this huge deficit if not by “creating a preemptive global war”, as were the cases in 1914 and 1939?

The US has nothing much to offer economically for stabilizing world economy and finances.  What Europe needs from the US are two things:

First, releasing the huge ammunition reserves for resuming the small-scale preemptive wars in Libya and the potential unstable regimes around the Mediterranean Sea and parts of Africa.  It is the abundance of the US military hardware and ammunition that is making NATO organization an acceptable agreement to the EU.

Second, the EU hopes that the dollar will maintain its global status for a couple of years before a basket of currencies is agreed upon. What else the US can be of any help for the time being?

These spring uprising of youth movements around the world have a common denominator: “We want to have a direct say in public decisions”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

adonis49

adonis49

adonis49

July 2011
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031

Blog Stats

  • 1,443,033 hits

Enter your email address to subscribe to this blog and receive notifications of new posts by email.adonisbouh@gmail.com

Join 790 other followers

%d bloggers like this: