Jump to content
House Price Crash Forum
Sign in to follow this  
waitingscot

'we Are Now, I Fear, In The Early Stages Of A Third Depression.' Paul Krugman

Recommended Posts

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

The Third Depression

By PAUL KRUGMAN

Published: June 27, 2010

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

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.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

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.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

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.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

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.

Share this post


Link to post
Share on other sites

Whilst I am inclined to agree with the headline, the argument that it is budget trimming which is causing the trouble is madness. It is the fact that there was massive overspending and loose credit for years that is causing the pain we feel. Prescribing more borrowing, which cannot be paid back either, is not a policy - just the way to currency destruction. The fact that a depression may be caused by reining in spending, is not a reason to borrow more.

TO speak as if the wave of govt bail outs somehow was a cure that is being withdrawn is rubbish. It was not a cure, just a drug injection to keep the pain at bay a little longer. Let me tell you now; the morphine has stopped working.

It is all about fiat currency under threat of extinction. It is competitive devaluation. 40 years of budget irresponsibility is going to be paid for one way or another all around the western world.

Share this post


Link to post
Share on other sites

Another V.I. inflationis, probably up to his eyes in borrowed cash and wants everyone else to pay for his borrowings with their savings.

Embrace deflation, it rewards the savers ( i.e. the systems creditors ) and punisheds the debtors ( i.e. the takers ). What's not to like about deflation.

Edited by TheCountOfNowhere

Share this post


Link to post
Share on other sites

Another V.I. inflationis, probably up to his eyes in borrowed cash and wants everyone else to pay for his borrowings with their savings.

Embrace deflation, it rewards the savers ( i.e. the systems creditors ) and punisheds the debtors ( i.e. the takers ). What's not to like about deflation.

The fact that it makes banks which are typically leveraged to the eyeballs, fold. Your savings better be in physical cash if there ever is actual lasting deflation (unlikely as the powers that be will do anything to avoid it)....

Share this post


Link to post
Share on other sites

The fact that it makes banks which are typically leveraged to the eyeballs, fold. Your savings better be in physical cash if there ever is actual lasting deflation (unlikely as the powers that be will do anything to avoid it)....

Just remember...dont panic....last...panic first.

Share this post


Link to post
Share on other sites

Perhaps Krugman needs to read some history, they where called panics and crisis's at first. Not depressions. Depressions get used as the term was used because it had at the time less negative connotation than panics or crisis's. Then they had the Great Depression so we had another name change to recession. Then that changed to downturn.

Edited by interestrateripoff

Share this post


Link to post
Share on other sites

What's not to like about deflation.

Just as inflation causes more inflation, deflation causes more deflation as people put off buying decisions as they wait for things to get cheaper.

Maybe in a world where we all lived on little farms and were more or less self sufficient the comment 'what's not to like about deflation' might be sensible.

In today's world, it is insanity. If you want mass unemployment and social unrest, deflation is your friend. If you want life to tick along on an even keel - modest inflation along with modest economic growth is your friend.

Brown and co have a lot to answer for in allowing an inflationary spiral to take place in property prices.

Share this post


Link to post
Share on other sites

Whilst I am inclined to agree with the headline, the argument that it is budget trimming which is causing the trouble is madness. It is the fact that there was massive overspending and loose credit for years that is causing the pain we feel. Prescribing more borrowing, which cannot be paid back either, is not a policy - just the way to currency destruction. The fact that a depression may be caused by reining in spending, is not a reason to borrow more.

TO speak as if the wave of govt bail outs somehow was a cure that is being withdrawn is rubbish. It was not a cure, just a drug injection to keep the pain at bay a little longer. Let me tell you now; the morphine has stopped working.

It is all about fiat currency under threat of extinction. It is competitive devaluation. 40 years of budget irresponsibility is going to be paid for one way or another all around the western world.

Beautifully put terrifying to contemplate.

IT's THE END OF THE WORLD AS WE KNOW IT- .

Share this post


Link to post
Share on other sites

Just as inflation causes more inflation, deflation causes more deflation as people put off buying decisions as they wait for things to get cheaper.

Don't really believe this fully as this is a classical argument used by Krugman and Co and the neo keynesian. Just as not many people have go out to buy all the toilet paper they can get in the world because of a small inflation, I doubt people will hold off buying things they really want/need just because the price is going to decrease by 2% in a year. For the essential (food, petrol etc), waiting is of course not an option. Even for luxuries, everyone knows that iphone4 will cost probably half its price in a year time and yet the queue is as long as it could get. People know their car will worth 30% less as soon as they drive out of the car dealership and yet they buy it anyway..

People stops buying investment (err...like houses) when they expect its price to fall (they should have treated house as consumption).

Also, while inflation can go to infinity, deflation has a floor.

Deflation of course gives problems to those who have invested in things using lots of debts and hoping to be 'bailed out' by inflation. But that is another matter. But there is nothing for these group to worry as the BoE et all have a very good printer.

Edited by easybetman

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

Less credit, less disposable income, more unemployment, wage freezes, reduced bonuses = less money = less to spend.

People will have to learn to do things differently, shop around, cut down on waste...the rich will not escape the pain.

The best way for people to start feeling more confident and start spending again is to reduce the cost of land, housing and all rents.......good for business ;)

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

A price worth paying for what, the last 40 years of policy and monetary insanity, perhaps you should have told someone back in the 70s then it may have been avoidable, although probably not as cycles are cycles and humans always act the same in them

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

Look - it is either pain now and pain for me or pain later and pain for the children. It is not a question of price worth paying, it is either a price to be paid by the people

entering employment/in employment now or by people coming into employment in 5 years time.

The least pain way out is to default via inflation which is potentially morally wrong (depending whether one is left/right wing). (but inflation and inflation expectation can turn hyper, so not a safe route either).

Share this post


Link to post
Share on other sites

They think they can control inflation like the Three Bears prorridge-just right. What a load of b0llocks. Just imagine if we had twenty years of deflation. A world where asset prices came down, the feckless went bust, wages decreased and we could compete with the Chinese on everything. OK we had less "stuff" but so what?

Share this post


Link to post
Share on other sites
Just as inflation causes more inflation, deflation causes more deflation as people put off buying decisions as they wait for things to get cheaper

Are you typing that on a commodore 64?

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

So what's your alternative that's not simply going to bring us around to the same problem a few years down the line, but even worse? Please look at what got us into trouble in the first place. There's no way out of this without pain. All you can do to avoid pain now is to put it off for a bit and get even more later. Best get it out the way ASAP.

Share this post


Link to post
Share on other sites

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

I think the Austrians would counter that this is going to happen one way or another, and the later we put it off, the more pain it will cause. We could have taken medicine earlier and had less pain, it's put off and now the pain is back. They might be able to put it off again, but then it's going to come back, again, worse, and cause even more pain.

Nobody (at least, not me) wants to cause unnecessary pain and suffering. However, if a little pain and suffering now averts a lot of pain and suffering in a few years, well.

Share this post


Link to post
Share on other sites

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.

No matter whether you agree with the cuts strategy or not, the above conclusion is inescapable. And I do not think it is a price worth paying.

The warnings were ignored .

Commonsense was unheeded.

What escape do you suggest?because i believe there isn't one.

Share this post


Link to post
Share on other sites

We can only hope for a "depression" like that in the 1870's. From wikipedia:

Between 1870 and 1890, iron production in the five largest producing countries more than doubled, from 11 million tons to 23 million tons, steel production increased twenty-fold (half a million tons to 11 million tons), and railroad development boomed. But at the same time, prices in several markets collapsed - the price of grain in 1894 was only a third what it had been in 1867, and the price of cotton fell by nearly 50 percent in just the five years from 1872 to 1877...

Bad for the farmers at the time, and those that believe ever expanding credit is the best way to grow an economy.

Share this post


Link to post
Share on other sites

The fact that it makes banks which are typically leveraged to the eyeballs, fold. Your savings better be in physical cash if there ever is actual lasting deflation (unlikely as the powers that be will do anything to avoid it)....

Thats what they want you to think.

Isnt the beauty with securitization that 90% of lending isnt financed by FSCS backed retail deposits, but by bonds that arent guaranteed. Or that the guarantees are from CDS issuers that would fail. (not necessarily a bad thing).

Share this post


Link to post
Share on other sites

Whilst I am inclined to agree with the headline, the argument that it is budget trimming which is causing the trouble is madness. It is the fact that there was massive overspending and loose credit for years that is causing the pain we feel. Prescribing more borrowing, which cannot be paid back either, is not a policy - just the way to currency destruction. The fact that a depression may be caused by reining in spending, is not a reason to borrow more.

TO speak as if the wave of govt bail outs somehow was a cure that is being withdrawn is rubbish. It was not a cure, just a drug injection to keep the pain at bay a little longer. Let me tell you now; the morphine has stopped working.

It is all about fiat currency under threat of extinction. It is competitive devaluation. 40 years of budget irresponsibility is going to be paid for one way or another all around the western world.

we don't necessarily have to have a third depression though,it just depends HOW our capital is deployed.

if we follow the NuLabour route,and blow it all on quite frankly useless public works projects and welfare,then we are well and truly screwed.

IF we target it in places that can give a "value added" benefit,such as energy efficiency,food technology and so on,we still have a chance of making it through with only a moderate level of pain to bear.

for instance,if we can devise products that can recycle our plastics,and reduce our oil consumption from 8 bbl per capita per annum down to 3 or 4..then we don't have to worry too much about north sea oil running out or mad mullahs holding us over a barrel(excuse the pun)

likewise with food..if we can find suitable methods to grow decent arable(preferably by natural hybridisation rather than genetic molestation),we can reduce demand for some of this produce having to be imported from the remotest corners of planet earth.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.