The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

World Economy at One Minute to Midnight

Over the last week, portents of doom have enveloped the Parallax Brief. Increasingly, a Great Depression of the Twenty Tens looks to be the fate of the world. Lest we forget, the economic turmoil between 1914 and 1945 led to political upheaval almost unimaginable now, and unleashed the horrors of total war on the developed world.

Why do I feel so pessimistic?

Ambrose Evans-Pritchard, yesterday:

“The yield on 10-year US Treasury bonds – the world’s benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.

This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The “real” cost of capital is rising as the slump deepens. This is textbook debt deflation.

[…]

Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc.

German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936.

Spain’s unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data… Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US.

[…]

Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia’s GDP contracted at a 29pc annual rate in the fourth quarter.”

And Willem Buiter wrote in his Financial Times blog last week:

“I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression. Now I’m not so sure.

[…]

We can go down in history as the generation that created the Great Depression of the Noughties. Just keep on beating the protectionist drums. Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK. And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects. Yes we can! I hope we won’t.”

Nobel Laureate Paul Krugman responded to Buiter by saying:

“I share his fears, though not in all details… So yes, we can have another depression — because those who refuse to learn from history may be condemned to repeat it.”

And Martin Wolf was also on board, writing his FT column from Davos, where he described the mood as being “gloom verging on despair”:

“This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas.

We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action.”

Yet on this point, Krugman wrote over the weekend of the latest Crongress-driven cuts in Obama’s stimulus plan:

“According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

The real question now is whether Obama will be able to come back for more once it’s clear that the plan is way inadequate. My guess is no. This is really, really bad.”

The doomsday clock is ticking rapidly toward midnight, and I fear now that this will all end very badly.

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5 Responses

  1. Tom Awtry says:

    Here’s a never considered concept for an economic stimulus package that is centered not only on President Obama’s package, but also on the minimum wage, immigration, outsourcing and exporting Technology, which I feel would stimulate the economy faster than what’s been presented in both the House and Senate.

    http://ourcountryspresident.wordpress.com/2009/02/09/minimum-wage-the-key-to-an-economic-stimulus/

    • parallaxbrief says:

      Thanks for the post, Tom.

      Having followed the link posted and read your proposal, I’m not sure I can agree with you. First, raising the minimum wage to 8 bucks an hour might be ok in boom times, but in the current economic environment, you might find it actually increases unemployment by exasperating the situation for already hard-pressed companies. And additional money given to people at the moment – whether through tax breaks or an increase in the minimum wage — is likely to end up being squirreled away, rather than spent in the economy, as we are in “paradox of thrift” territory.

      Plus, your idea that it would encourage people off welfare is fine, but at the moment there are so few jobs that hundreds of thousands of Americans are finding themselves newly deposited on welfare every month. I’m all for encouragement to work, but there aren’t enough jobs for the people working right now, let alone the ones already on welfare.

      Second, much of your proposal was generally protectionist and anti-free trade in ideology. Without going into detail, at the very least I think you should revisit the Smoot Hawley Tariff Act of 1930 and brush up on some of its effects.

      I’ll be following your blog with interest Tom. Please visit again soon.

  2. DDT says:

    Raising the minimum wage to only 8 bucks will not work because it is not enough. It is not possible to live on. The minimum wage should be raised to at least 10 bucks an hour, maybe even 12. You’ll find that even illegal immigration will slow down to a trickle if the minimum wage was adequate. Americans would again be working in jobs lost to illegals. Thereby saving all those cash dollars from being sent to Mexico in the form of support for families of Mexican nationals.

  3. Russian Lad says:

    Actually, printing more money will only exacerbate the situation. Money is just paper, not goods or services. Gold standard is the only option. And yes, some people will starve and die in the process.

  4. parallaxbrief says:

    Russian Lad, let me say now that the Gold standard, if we were still shackled to it, would have forced us already into a depression.

    I don’t understand why that would be a good thing.

    The gold standard removes one of the government’s key methods of influencing the economy, namely, monetary policy. Without this vital counter cyclical lever, coutries are left prone and exposed to the whims of the market.

    Look at what’s happened to Spain, Ireland and Greece without the ability to set their own monetary policy. Without the benefit of being able to reduce the value of their currency to regain competitiveness, they must deflate — an infinitely painful process. All three countries are already in depressions.

    What good is that to the world? Surely, if you think that governments run fast and loose with the printing presses, that’s a reason for you to criticise monetary policy, not to seek a return to the gold standard, which would simply return the world to regular, painful bouts of deflation.

    What is your reasoning for a return to the Gold Standard?

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