The New Depression

Visualize a sinking ship with captain and crew frantically bailing out water to keep the ship above the waves.  Now, instead of a great wooden vessel, imagine a credit-inflated rubber raft from which credit is leaking through numerous holes.  Policy makers are desperately pumping more credit into the raft to stop it from going down.  That raft is the global economy.  Humanity lives on top of it.  There are no lifeboats.  If the raft sinks, people are going to die.  

That harsh reality is driving and will continue to drive economic policy.

The prospects for rescue are far from certain, and in fact, diminishing with each passing month.  Nevertheless, policy makers can be counted on to keep pumping credit into that raft until their strength runs out.  They are lost at sea and don’t know what else to do.

Richard Duncan, The New Depression, ch. 7

Buy it.  Read it.  Very sobering stuff, but an essential guide to understanding what has been happening in the world economy over the past few years, why politicians are doing what they’ve been doing, and what, if anything, can be done going forward.

2 thoughts on “The New Depression

  1. Brad Littlejohn

    Well, it depends. He thinks there are basically four options going forward (and note that he's writing this from a very US-centric standpoint, as he thinks that what happens for the US economy over the next few years is essentially determinative for the world as a whole—basically plausible, though I think a bit oversimplified):1) No further stimulus of any kind, whether fiscal or monetary, is given. In this case, the economy will go into recession again next year, followed by a quick unraveling into a new credit crunch, bank failures, and a full-blown, apocalyptic depression. 2) Further fiscal stimulus is refused, and the Fed resorts to additional monetary stimulus (quantitative easing). They're already well past the point of diminishing returns here and likely this will only buy another couple of years before implosion resumes, or else stimulus has to become so extreme as to generate runaway inflation.3) Another round of fiscal stimulus of the sort already given in the past couple years is begun. This could put us in a holding pattern for most of the rest of the decade, if sufficiently aggressive, and if there's political willpower to continue it, but that's doubtful. But it is still a very temporary fix, because this stimulus is essentially just financing additional consumption, rather than investing in a re-structured and more efficient economy.4) What he recommends: a major long-term government investment in innovation that will have very beneficial structural effects on the whole economy. His personal suggestion is a US solar power grid. This, he thinks, is the only potential way out of the mess. The first and fourth options are highly unlikely. The second is likely if the Republicans consolidate control in this election; the third is likely if Democrats come out on top in this election.What makes this book so fascinating is that Duncan is actually a disciple of the Austrians, especially von Mises (which means he makes a few annoying claims), but he's not an idiot. He realizes that however much one may decry structural distortions over the past few decades that have been created by too much government intervention in the economy and the monetary system, we have to work now with where we are. And where we are right now is that the only thing standing between us and a New Depression (which, he thinks, would be just as likely to lead to World War as the last Depression did) is forceful government action and expenditure.

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