The Wasteland

The BBC presents an interactive debt chart to demonstrate who owes what to whom:

This morass of interconnected debt rather reminds me of T.S. Eliot’s Wasteland:

That corpse you planted last year in your garden,
Has it begun to sprout? Will it bloom this year?
Or has the sudden frost disturbed its bed?

No flowers shall bloom from the stinking cadavre of interconnected debt . As I have explained, the lack of any real debt liquidation or deflation post-crisis has turned much of the global economy into a walking zombie, weighed down by an excessive debt load, and politically and socially incapable of addressing structural issues.

Dead bodies cannot return to the earth to grow anew unless they are allowed to decompose. But policymakers cannot countenance any kind of decomposition.

So the corpse sits in a tank of formaldehyde:

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3 thoughts on “The Wasteland

  1. I keep meaning to make this point to many of your posts, but keep putting it off so I can write it out thoroughly and more clearly. No more, I’m just going to say it:

    One of the constant themes in your writing is the Zombification of much of the world economy since 2008 due to all the bail-outs. This is very correct and immensely important; and like everything correct and important, it is hardly ever discussed by the clowns that play economists on TV and newspapers.

    But I feel you sometimes miss the monetary nature of this problem. Obviously, nothing in the mainstream is relevant here, you need to think of the implications of Austrian business cycle theory, and in particular the concept of malinvestment. The reason these zombies came into being is that expansionary monetary policy destroys the price mechanism by debauching the currency. This kills prices as a feedback mechanism and prevents markets from conveying signals to producers on what to produce, what not to produce, and so on. This causes all sorts of bullshit useless economic activities to flourish not because they satisfy consumers, but because they have access to Uncle Ben’s Magic Technology Called The Printing Press. These businesses continue to suck away capital from productive enterprises and directs them towards the production of bullshit: financial derivatives, endless McMansions nobody wants to buy, etc…

    As long as Uncle Ben’s Magic Technology Called The Printing Press continues to shower the bullshit economy with credit, these businesses continue to thrive at the expense of productive capital. But that is obviously unsustainable and must end in one of two ways: if Uncle Ben is a true Keynesian believer, then you get Zimbabwe. If Uncle Ben worries about price inflation, he cuts down on his credit expansion, like he did in 2007, and the result is a recession and crash. This is a far more insidious problem than simple price rises.

    The importance of the recession then is that it clears out the zombies and bullshit economy and allows its capital to be redirected to productive use. So of course you’re absolutely correct in pointing out how this insane bail-out culture has cured the zombies, instead of curing the economy that is the victim of the zombies. But the real problem was not in bailing the zombies out, it was in creating them in the first place, and for that, you must be thankful to Uncle Ben, again.

    • I agree with almost everything you wrote there. What we really have is a disagreement on emphasis. Is it malinvestment that creates zombification, or is it bailouts? Well, the answer is both, but I think many Austrians have missed the most significant zombifying factor — modern monetary policy does not allow significant price deflation or credit contraction, which means that there are no longer what I call cleansing crashes that clear out the debt:

      The source of the debt (malinvestment or no) doesn’t really matter — there was malinvestment and debt-fuelled bubbles long before there was modern monetary policy. Now I don’t deny that artificially low rates create a heck of a lot of malinvestment. But no malinvestment-driven or debt-driven boom is sustainable: eventually prices crash and the rubbish and nonsense is cleared out. The difference is that without central banking, the clearout was much quicker, via a period of price deflation. Central banking gets rid of this mechanism.

      I suppose the difference here is that I take a “soft” Austrian view: central banking exacerbates, rather than creates the business cycle. I suppose the point that I need to get across is that it is not just currency pumping that can distort prices and confuse producers. Although the market has far more information than any central planner, it is still blind to a lot of things that can dramatically change the economic picture: weather, climate, wars, natural disasters, new inventions, and various black swan possibilities.

  2. I don’t quite agree with this: “I think many Austrians have missed the most significant zombifying factor — modern monetary policy does not allow significant price deflation or credit contraction, which means that there are no longer what I call cleansing crashes that clear out the debt”

    That is precisely the Austrian point about the recession: it is not the problem, it is the solution. The problem was the bubble that created all the zombies and the recession is the exorcism of zombies. Preventing the recessions doesn’t save the economy; it saves the zombies. And that, as you surely know, is the main thing that Keynesian know-nothings criticize Austrians for: “Austrians want a depression! The Austrian criminals want you to suffer when Lord Keynes has shown us the righteous path of avoiding depressions.” If only these morons knew that the only cause of this recession is the previous Keynesian prescription to avoid the previous smaller recession.

    “there was malinvestment and debt-fuelled bubbles long before there was modern monetary policy”

    Again, the problem is not monetary policy per se, the problem is monetary expansion, and this can be done in many different ways (printing, bank credit expansion, selling gold reserves, etc…) not just modern Keynesian witchcraft.

    I think this is an incorrect way of approaching the question of business cycle, and is built on internalizing a lot of the nonsense of modern economics: “Although the market has far more information than any central planner, it is still blind to a lot of things that can dramatically change the economic picture: weather, climate, wars, natural disasters, new inventions, and various black swan possibilities.”

    These things do not cause business cycles. These things are shocks which the price mechanism deals with. Talking about the market being blind to these things misses the point. These things are only known when they happen, and once they do, the “market” (here one must suspend dumb Keynesian aggregates and anthropomorphism) is merely the sum of people’s reactions to these events as they happen. It’s not a business cycle if there’s an earthquake in Chile that hurts copper production leading to a rise in the price of copper and substitutes: that’s the normal working of the market mechanism. Thinking that this is a business cycle fundamentally misunderstands what a business cycle is. The business cycle is different, it is what happens when the price mechanism breaks down and the result is a systemic, cluster-of-errors across a full sector of the economy. The only reason the price mechanism breaks down is the tinkering with the money supply.

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