The Economist: “Be Afraid (Unless We Print a Lot More Money)”

While most readers of this blog will be convinced of (or at least open to) the idea that the global financial system is fundamentally broken, and either needs to fail or at the very least needs to undergo a radical transformationsome of us believe that the problem is basically a lack of demand, and that the entire solution lies in printing fuckloads of money, giving it to the people who brought us Solyndra, and hoping for the best.

From today’s issue of the Economist:

Lacking conviction and courage

In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.

The alternative view (as I have spelled out many times before) is that no amount of monetary policy without at the same time addressing the underlying real-world problems will solve the problems. Problems will just be kicked down the road, to re-emerge at a later date:

Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…

Until we address the underlying problems, the market — in the long run — will keep crashing. And in the long run, we’re all dead. So that’s twice as bad. Junkiefication leads to junkification.

There was always the hope that kicking the can down the road might give us an opportunity to address those underlying problems. But it doesn’t seem like we have. Risk and leverage are greater than they were in 2008. Moral hazard is ready to rear its ugly head. The global trade structure is as fragile as ever. America is just as dependent on foreign energy and manufacturing. Deleveraging is proving costly and painful. Worst of all, many of the dangers inherent in the financial system have  now been transferred via bank bailouts to the sovereign level — like in Europe.

So no — the real reason to be afraid is not that policy-makers are not showing Bernanke’s famous Rooseveltian resolve. The real reason to be afraid is that what occurred after 2008 merely suppressed the symptoms of an underlying sickness.

They can’t. Only real reform — solving the underlying problems — can.

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14 thoughts on “The Economist: “Be Afraid (Unless We Print a Lot More Money)”

  1. Aziz, Real reform from whom? The politicians? The Presidents? Central Bankers? UN?, Maybe some of the think ThinkTanks? Every one of these are part of the cabal in and of itself it one form or another. The construct that has blanketed the people is oppresive and heavy. I fear the reform in the traditional sense is a moot point, but maybe that is your point. Prepare for the inevitable crash that is breathing down our necks. For the time being, precious metals in the physical sense is the only way to preserve your capital and emerge on the other side in one piece.

    • Real reform like cutting American oil and goods dependency, restarting American manufacturing, ending the wars, slashing taxes on the middle classes, ending the bailouts, and letting banks fail if they run out of liquidity. I think the system is completely fucked, and it needs to collapse. If the government has any job, it’s letting the collapse happen with as few real people getting hurt as possible.

      But real reform needs to come from the people of the nation, not the government.

      For the time being, precious metals in the physical sense is the only way to preserve your capital and emerge on the other side in one piece.

      Agreed.

  2. Those guys like Krugman seem to be operating in a fantasy world where there are no such notions as misallocation of capital and limited resources. I think their logic is somehow along the lines of: let’s keep stimulating the darn economy and the human ingenuity and genius will prevail and find ways for solving all current problems and maintain unlimited growth to the stars and beyond. This logic however is akin to putting the cart in front of the horse and can prove disastrous.

  3. http://www.bloomberg.com/news/2011-07-22/default-now-or-suffer-a-more-expensive-crisis-later-ron-paul.html

    According to Ron Paul, America has already defaulted three times and currently is just choosing a continuous default by debasement over an abrupt one by missing payments. For me it’s sad that the Japanese, Taiwanese and particularly the Korean governments are too afraid to sell their hoards of US Treasuries because what they only care is maintaining their currencies lower in the freefalling USD terms so that their “export competitiveness” won’t decline. I bet I’ll never receive my pensions after I retire.

    • I think the entire “export competitiveness” argument is a sham. If anything, debasing your currency makes imports — including imports of raw materials relatively more expensive.

      In any case, prices adjust to FX rates pretty quickly. I think it’s just an excuse for the Keynesians to print more, and more quickly to “raise aggregate demand”.

      • I totally agree. If currency depreciation accomplishes anything at all what it does is transferring wealth from the poor and middle class via soaring food and fuel prices to the large corporate-groups who maintain their nominal wage levels stagnant(sending real wage underground).

  4. Aziz, I am sure you have studied the decline of other empires. From the Romans to the Russians, The Chinese to the Greeks, the Persian to the British its always the same. War equals conquest, power, and greed for a few at the top of the pyramid. This conquest breaks the moral spine of nations. Once the moral spine is broken from a macro aggregate pov then its just a matter of time, and pressure. Its not enough to have personal morals and ethics. These values must permeate the nation and right now its completely fractured with no sense of congruence. You are 100 percent right, and I am convinced that it must fail. There has to be an inflection point, a paradigm shift, not just for one particular nation but for our species in general. Call it Karma, or you reap what you sew, or any other idiom you can think of, you cant sew seeds of greed, conquest, power, immorality and expect to get a long lasting sustaining harvest from those seeds. Just my two cents, but when will our species get past this nonsense.

  5. The problem is central banking, fiat currency and fractional reserve banking. The problems are built into the system, democracy simply allows the money power to rule, politicians give this privilege to the bankers and function as a firewall protecting the bankers banks. The rest of us not privileged people are forced to use their funny money and we are fleeced by them, we compete against each other instead of removing the central bank system.

  6. I thought it was just me getting the feeling that the economist has been seeeeeeeeeriously going into pushing for “spend-spend-spend, i know better than you”. Seriously putting me off their magazine in recent months. They don’t even acknowledge their bias or that there are serious economists with other views. Also another warning sign I see of them going down a wrong path: the good thing I saw in economics was people analyzing and weighing things, leaning on numbers more than rhetoric, so a personal warning flag I have is when people appeal to emotional arguments like “european leaders should show more ***courage***” and other emotional “you should do this” epithets like that. With simple rules like that I find it easier to distinguish between totalitarian rhetoric of the “follow me, I know better” persuasion and actual economics books in which the authors provide 99% data and reasoning and try to detach as much as possible from the moral dimension (Mises comes to mind as a good example). What the economist is doing now is I think the reason most people I talk to have a bad opinion of economics, because of those “economists” which have high powered political jobs and vested interests or aspire to such jobs by giving advice… it’s a pity as the reason I was attracted to many economics authors was the fact that they studied and reasoned… But no matter, the search for the truth is ongoing and there’s many real researchers and people with good intentions who are gonna continue the fight, and with the internet now we have a bigger chance!

  7. I have concluded that we are all ruined. No one can agree on the right solution. Governments don’t know how to manage the economy. Central Bankers destabilise it.

    I agree with Aziz’s pleas to fix the underlying problems. But that won’t happen in a coordinated way. The main sickness the world faces is a lack of leadership due to partisan democratic infighting.

    Even if someone on the Internet had the “Perfect Solution” i.e. they came back from the future with the answers. Pun: Bernanke went back to 1929. We could not agree on their solution.

    Maybe our last chance is a Totalitarian Ruler, who will take control and solve all the problems; one world currency, fiscal control over nations etc. But that won’t happen. People are too proud to join a one world government (Unless they were broken economically).

    My honest solution to this mess is:

    1. A stable interest rate (Abolish central bankers) Free exchange rate (No central bankers)

    2. 10% Flat Taxation on Business Revenue and Income (Workers will negotiate their own wage in light of the expenses incurred in earning revenue). This will help abolish wasteful Taxation departments and end of year Accountants. Governments can adjust to the Fiscal deficit by cutting back waste and bloated departments.

    3. Ban Military spending. Let any foreign power take control if it wishes. Let one simple well maintained nuclear warhead strike on the war mongers capital. That will render his army obsolete for fear of their loved ones being incinerated. The UN is responsible for pressing the button.

    4. Infrastructure (Power, Water, Gas, Roads, Ports, Airports, Fuel Networks (Gas Stations) all nationalised to prevent Duopolies and profit gouging.

    5. An emphasis on smaller innovative enterprises of the future, through removal of monopolistic advantages through government policy. “Trust Busting”

    This will reduce Government imbalances in the economy via taxation policies, and will keep interest rates based on the availability of credit, dispensed by smaller community banks. Bankers will know their customers because they will deal with them, and research their standing in the community. Interest rates will reflect the cost of capital, and community banks will rise and fail based on prudent techniques. Smaller innovative enterprises will find their niche. With no Government or Central banker intervention, the only thing that is hard to plan is future sales. Not interest rates or government policy blunders wiping out your business model.

    Anyone share any other ideas? What is the chance of Governments walking away; Economic Anarchism? Will Communism be given a rerun?

  8. ever wondered what Google CEO has to say about economy?

    http://www.bloomberg.com/news/2011-10-03/google-s-schmidt-urges-using-big-levers-to-stoke-u-s-growth.html

    Where is the demand going to come today if it’s not from some form of government action?

    “The federal government can spend as much money as it wants because we borrow in our own currency,”

    Economic growth comes from the private sector with government assistance

    All of the economists that I know agree that in a situation where there is a strong possibility of a very long- term recession, or at least a structural growth recession, which many people think we’re in, you need to do something now

    Any ideas on which economists he’s talking about?

  9. Pingback: Steve Jobs, Jobs and Reincarnation « azizonomics

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