Ah, dejame entrar, dejame ver algún día como ven tus ojos

René Christian Moya

René Christian Moya
Los Angeles, California, United States of America
December 31
Socialist, pur et dur. I was born and raised in Los Angeles, but have spent the majority of my adult life elsewhere. I spent the first half of the noughties living in New Hampshire, Edinburgh, Montevideo & (very briefly) New York. I spent the better part of the next six and a half years in London. Trying to find my way back in Los Angeles since 2013.


OCTOBER 24, 2011 7:56PM

‘Down, down, down. Would the fall never come to an end?’

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[Originally posted on my Wordpress blog]
'The recovery has finished, we are now contracting.’
– Chris Williamson, chief economist at Markit (22 September 2011)

I’ve never liked Niall Ferguson. You see, Ferguson has always struck me as a stereotypical English academic–arrogant and theatrically brash, always expecting deference, especially from a captive American audience. This latter bit plays into an eccentricity of his type–he’s a typical Tory Englishman, in thrall to the ‘idea of America’. Of course, it’s the idea what matters; they’re quite often willing, simultaneously, to condescend to AND flatter Americans. Not that all of us have time for his sort; Daniel Gross of Slate pegged him correctly:

H.L. Mencken tagged the Puritans as people possessed of the “haunting fear that someone, somewhere, may be happy.” Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance.

Indeed. Coincidentally, Gross was honing in on Ferguson’s credibility–or lack thereof–in making (again, typically) arrogant claims about the economy, whilst debating Nobel Prize-winning economist Paul Krugman on the effects of fiscal stimulus in the United States. Ol’ Niall took up the baton for the neo-classically-inclined economists, who believe that fiscal stimulus will inevitably ‘crowd out’ private investment. How would we tell? I’ll let the man impale himself:

A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

How’s that going for him?

What you see on the left is the current US 10-year government bond yield rate. Last week it was plumbing a Japanese-like 1.77%. The image on the right puts that number into perspective; you can see that US 10-year yields are now lower than they were at the height of the Great Recession two years ago. So what’s going on here?

The Past, as Ever, Is Prologue

Generally, the global economy is slowing. This is the result of two factors. First, there’s a huge background story to tell–that of the financial crisis of 3-4 years ago, which punched a hole through the finances of millions of people across the developed world. The result of that crisis is a retrenchment of the private sector–in response to falling asset prices and/or income–leading to what Richard Koo calls a ‘balance-sheet recession’. In such a recession, the private sector responds to a negative economic shock by deleveraging–paying down debt instead of spending. This in turn leads to a fall in aggregate demand, which ceteris paribus, the public sector (and/or a massive trade surplus) must cover if there isn’t to be a general, prolonged economic decline. Koo applied this term to Japan post-1991 and to the United States post-1929.

A declining economy should lead the central bank and the treasury to respond with either monetary or fiscal stimulus, respectively. This isn’t a wholly uncontested thesis. The neo-liberal, Nobel Prize-winning economist Milton Friedman insisted that the central bank could always prevent a general slump so long as it could increase the monetary base, which it controlled. But as Krugman and others argued early last decade from Japan’s experience, countries could fall into a ‘liquidity trap’, where central bank policies would fail to gain traction, short of very radical policy moves. Krugman argued then, and argues now, that only a credible promise by the central bank to induce prolonged, moderate inflation of about 4-5%–accompanied in some variations of the thesis by a vast and sustained fiscal stimulus–could pull an economy out of the slipstream of disinflation and poor (or no) growth. (Note: folks like Richard Koo and modern monetary theorists would argue that fiscal stimulus alone could do the trick, based on different models. In all of these stories, fiscal stimulus is essential.)

That’s the back story. The second factor for our present travails is the direct result of a failure to understand, absorb and implement these lessons. A general failure of policy on the part of politicians across the developed world is quickly leading us back to recession. In the United States, president Barack Obama’s 2009 ‘stimulus’ package was too small–it could neither make-up for the retrenchment of the private sector, let alone make up for the fact that in aggregate, public spending (federal, state and municipal) would barely budge at all. The figures below make this abundantly clear:

The figures above show that general government spending has actually been a NEGATIVE contributor to GDP for six out of the last 10 quarters, or for most of Obama’s presidency. America never really applied a Keynesian stimulus to lift the economy out of the doldrums. No significant, sustained stimulus; no significant, sustained recovery.

Europa, Europa

Meanwhile, in Europe, policymakers–at the behest of Germany, Finland and the Netherlands–have embarked on a suicidal auto-da- in liberal economic theory. The context, of course, is the European financial crisis–which can best be summed-up as a slow-motion sovereign-bond and bank run. Not that most would know this, given the mainstream press has done its bestest to obfuscate and overly simplify the reasons for this crisis. It is anything but simple: its causes range from the fraudulent use of financial statistics (Greece), to competitiveness problems vis-à-vis Germany (Greece, Portugal, Italy, Spain), to an over-leveraged private sector stemming from ultra-cheap credit in booming countries (Portugal and Ireland), to a property boom gone bust (Spain and Ireland). It is notable that ONLY in Greece was an over-mighty public sector to blame. Spain and Ireland mostly kept their government books balanced and their debt low.

But of course, why waste a good opportunity to trash the welfare state once and for all?

And so, on the back of self-righteous northern Europeans–led by Germany–Europe is about to kick-down the only remaining source for growth in an enfeebled economy (the government) whilst doing next-to-nothing to permanently resolve the Eurozone’s flawed architecture. Germany has enacted a constitutional fiscal break, and vigorously argued against further stimulus (ironically, it was very-well targeted fiscal stimulus enacted by the government in 2009 which partly explains Germany’s resurgence after the recession ended); the Netherlands and Finland have engaged in populist demands to punish Greece; the UK has begun a mindless drive towards austerity, despite its own abysmal recovery, to ‘appease the markets’. Anywhere and everywhere–from Italy to Ireland, Germany to the Baltics–the countries of Europe are cutting back public spending in the teeth of a slowing world economy. Couple this with the idiocy of the European Central Bank–which has played politics and foolishly raised interest rates twice this year, despite evidence of an economic slowdown and a depression in the periphery–and you have the perfect recipe for an economic storm.

There is currently considerable hand-wringing worldwide about Europe’s inability to cope with this crisis. I would argue that any credible plan must have three parts. In the short-term, the EU must deploy a shock-and-awe defence of the single-currency. This must mean credible amounts of cash must backstop any EU state facing short-term funding crises. (In a saner world, the ECB would create by fiat a massive, liquid fund which it would promise to deploy as a shield only when markets were stressed.) This does not mean Europe should avoid inevitable defaults in lost-cause cases like Greece. This would simply serve as a guarantee to burn any speculators who dare test the EU’s resolve and thus insulate the Core from contagion.

In the short-to-medium-term, the EU needs to adopt a credible strategy to reflate the European economy. This is no small matter: without a sustained economic recovery in Europe, the EU’s peripheral states will not have a fighting chance at readjustment within the eurozone. This would mean the Core EU states (Germany, the Netherlands, etc.) who have fiscal room for manoeuvre adopting policies to expand domestic demand (fiscal stimulus, an increase in real wages, etc.) and the ECB accepting higher-than-average inflation. Finally, the EU must credibly re-focus long-term economic governence in the eurozone. This must include putting inter-EU competitiveness convergence at the heart of policy, with a realistic and humane policy to achieve this–permanent austerity and depression is not the answer–whilst vastly reforming existing EU institutions. The ECB should have not just a monetary stability mandate, but also explicit employment and financial stability mandates; there needs to be greater coordination and/or integration between Eurozone states.

None of this is easy, nor is it a foregone conclusion that European policymakers will realise any of this before it’s too late. Myopia, and bad reasoning, has won the day. This path of least resistance will guarantee a disorderly Greek default, and the possible exit of Greece (and others) from the euro. Such an exit would probably pave the way for an unravelling of the single-currency itself. Who could credibly argue the euro is a stable international currency when its members act selfishly, uncoordinatedly and destructively?

The road to hell is paved…with what?

After the débâcle of the last three years–three years in which much was promised (greater financial regulation, coordination, etc.) but little was achieved–I’m no longer convinced policy-makers have the desire to shape events towards an acceptable exit. Despite a once-in-a-century financial crisis, Capital has won; despite a generation of depressed wages in the West, Labour is yet again blamed as feckless. Despite continued slow growth, recession and even depression, austerity is the order of the day. Inequality continues its inexorable rise almost everywhere, profits and wages for the highest earners continue to mount, and people either retreat from democratic politics–or reject it outright. We have learned nothing from the experiences of the 1930s–indeed, we have wilfully forgotten them. It doesn’t matter that there’s plenty of evidence to suggest crisis is the inevitable result of an unequal distribution of capitalism’s bounty. We have a theory–economic liberalism–more akin to a faith, and damn the damage wrought across the globe.

So perhaps some cynicism is in order. Of course, cynicism shouldn’t be reserved for those in power–after all, look at the Tea Party in the United States, or Bild readers in Germany, or the ever-blasé majority of Middle England. In some ways this, too, is a crisis of democracy, as much as it is of capitalism–perhaps only less severe than that of the Great Depression. Except, of course, where it’s not; like in Greece or Ireland, or Iceland–which had the balls to confront these problems head-on, and has a new government and constitution as it comes out of crisis. But particular criticism is reserved for our economists, and politicians, and media. Those who should have known better, but don’t–or, more depressingly, won’t apply what we learned in the 1930s to our present circumstances.

I leave it to an astute (if random) commenter to close on this most of depressing of thoughts. This comment was found on the blog for Tax Research (a UK think tank), in response to a post arguing that the government’s austerity policies are leading the UK to a double-dip recession:

I do wonder if part of the issue you and many other commentators have with Osborne and co is that you/we are ascribing to them a primary economic policy aim which is in fact not their primary aim. We assume that Osborne and co’s primary concern (aim) is to get the economy growing again. And to be fair, this is the impression that Osborne and co promote.

But what if their primary aim is in fact to (try to) fundamentally restructure economic (and social) relations in this country (and beyond if they can) and that their belief is that to do that “austerity” is an essential tool. It can be argued that this is similar to the approach Thatcher employed between 1979-83. For example, under the cover of “austerity” we are witnessing a massive fire sale of public assets, planning laws are being relaxed, the NHS is being “restructured”, and so on and on, all to the considerable benefit not to the “big society” but to big business and big finance.

My conclusion would be that the “austerity” approach – and the narrative that’s been developed to support it – will not be dropped, regardless of any arguments put by the IMF, UN, you, Martin Wolf or anyone else – or the production of data that shows how dire the economic situation of this country is – until Osborne and his supporters are confident that their primary policy aim is sufficiently entrenched to withstand efforts to stop or undo it. Again, we see this approach reflected in the behaviour of Thatcher’s first government. And, furthermore, it resonates with the reported view of senior/influential Tory thinkers, that the first Blair government wasted their first two years in power. In summary then, we could argue that Osborne and co have simply been very good at learning from history.

Filed under: Economy, Europe, Politics, Social Democracy, United States Tagged: America, crisis, ECB, economy, EU, euro, Europe, European Central Bank, Eurozone, Ferguson, finance, financial, Friedman, Japan, Krugman, Obama, PMI, recession, United States, US

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