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The Coming Era Of Depression Economics


Like it or not, this is where we have been all along and a great many people are just now catching up. No matter what Janet Yellen says about the economy, she is talking out the side of her mouth. Internally, the recovery is gone, and it is never coming back. Externally, we have sub-5% unemployment so we all should be so happy, especially with, in her view, stable prices.

To their credit, many prominent economists aren’t so enthusiastic about those prospects. Among them are Larry Summers, Paul Krugman, and Brad DeLong, all who recognize that “something” just isn’t right and therefore “something” else should be done about it. Thus, the real economic debate over the coming years (unfortunately) will take shape around those two facets. Having wasted nearly a decade on purely central bank solutions that were never going to work, the real discoveries can now possibly take place.

The problem is as I wrote yesterday, in a rush to do anything and everything “different” the Trump administration might actually spoil the process. De-regulation and income tax cuts, as well as the repeal of Obamacare, are all very good things that sorely need to be addressed; but they didn’t cause this depression and thus won’t get us out of it. And you can bet that none of Summers, Krugman, or DeLong will be in favor of those options, so if they all fail to restore economic growth, as I believe they will if left in isolation, then that will severely diminish those ideas for perhaps a generation or more. That would be a fatal mistake, especially since for the first time in many generations people outside of Economics are receptive to “new” ideas (that are only new because they have been out of practice and actively discouraged for so long).

Krugman actually described our predicament very well all the way back in 1999. Observing the Japanese fall into these very same conditions (it’s always the Japanese first because their lost decade then has become our lost decade now), he wrote at MIT:

Now you could argue that the experience of the Depression and after provides just such evidence. Many economists thought that with the end of World War II spending the United States would revert to Depression-type conditions; a whole school of thought, the “secular stagnation” hypothesis, was built around that idea. In fact, once jolted out of depression, the U.S. did not fall back.

This has led many economists to believe that World War II was the answer to “secular stagnation” the first. In orthodox parlance, Krugman describes it as an S-curve with multiple equilibria, being careful to pronounce such analysis as dangerous because such a model would be, “a device that can justify practically any policy.” Even still, that is exactly how not just the US economy but the world economy acted in the 1940’s.

Thus, the secret would be to identify the event or cause by which the global economy was jolted and to use it as a matter of policy today. For Krugman, he of fake alien invasion fantasies, it was the government spending over WWII that did the trick. Therefore, governments in the 2010’s should be doing something similar in terms of size and depth, as well as sustaining those efforts for as long as it takes. This is why he embraced the idea of the ARRA as well as Abenomics, as both in their respective times seemed to be of sufficient size and duration so as to perform this “shock” into the higher order equilibria.

Not so fast, claimed Larry Summers. Writing in November 2015 when secular stagnation really started to catch on as QE-love faded fast, Summers points to the major flaw:

Paul studies an economy in liquidity trap that will, by deus ex machina, be lifted out at some point in the future. He makes the point that if you assume sufficiently inflationary policy after this point, you can drive ex ante real rates down enough to stimulate the economy even before the deus ex machina moment.


This is true and an important insight. But it seems to elide the main issue. Where is the deus ex machina? Where is the can opener? The essence of the secular stagnation and hysteresis ideas that I have been pushing is that there is no assurance that capitalist economies, when plunged into downturn, will over any interval revert to what had been normal. Understanding this phenomenon and responding to it seems the central challenge for macroeconomics in this era.

And so one of the primary routes of investigation over the past year or so has to been to further identify that deus ex machina without seeing it as such; “government spending” is far too general to be a useful guide. Some have proposed that the central bank should instead target a higher inflation rate, even 4% rather than 2%, but as much as that might satisfy some orthodox requirements economists are still left with “how would that work?” especially as central banking is on the wane for good reason.

The common theme for all these, and others that I have left out, is for some official agency, be it government or central bank, to be highly and hugely disruptive. All these “solutions” now finally and properly looking at the problem (depression) are based around the “shock.” The WWII thesis was of similar construction and belief, that disruption can be a positive force if only because of an existing negative mindset.

That, however, is not how this works. It is such a dark take on a capitalist economy, that once one falls down economists so often believe it will never get back up again without their assistance. And in the case of falling down, it never seems to occur that the cause of that fall was already some other disruption, so that further disruption might not actually be a good idea. Instead, greater disturbance might itself be the very cause of the dark mindset that economists attribute now to this supposed dark side of capitalism; or, as Krugman’s 1999 book was titled, in part, Depression Economics.

They are using a twisted sense of humanity and commercial liberty to justify why an economy needs to be further disturbed even if there is or can be no general agreement as to what or why that is. Summers was absolutely correct, as what they are all searching for is a deus ex machina, a derisive term from literature that smacks an author for lack of originality or insight. Thus is the state of Economics.

From a more positive view of capitalism, actual capitalism practiced without the heavy influence of especially central banks seeking to control prices and now markets, disruption is always a negative imposition. The primary goal of any policy is to seek out and assure stability. There were no redeeming qualities about WWII (the war itself, not our victory in it) let alone any that might be economic in nature. You can’t get ahead by destroying so much, no matter how shocking the process or the depression before it.

Instead, it would be more consistent that the global economy was positively “shocked” not by the spending actions to take out global conflagration but the re-imposition at long last of (more) honest monetary conditions. Bretton Woods took place in 1944, but will always be ignored by economists like Krugman and Summers because honest money is anathema to Economists who wish to be able to disrupt at their whim. Equating and soundly defining global monetary terms, for however brief (just 16 years), is a legitimate candidate for explaining in Krugman’s S-curve how the global economy skipped from the hugely costly equilibrium in depression to the utterly positive robust growth equilibrium that brought us, in good part, the Baby Boomers.

Is it really a mystery as to why an economy that is repeatedly intruded upon with some of the worst negative factors just won’t grow? Why any rational human would believe that a positive and sustained growth period could be created by “shocking” levels of negativity is itself a legitimate question. If you despise sound money because it would deny your place in the political order, WWII, in twisted fashion, looks really good as an alternate explanation.

Because of that, economists and Economists alike will never be able to find a “shock” big enough with which to push the US economy to that second equilibrim; they proceed under false assumptions and now others are doing it again (Trump “stimulus”). The greatest of these is beyond stable money to what constitutes money itself. As I wrote on the topic of secular stagnation in June last year:

Contrary to the core assertion of this view of secular stagnation, there was indeed another innovative revolution that altered the entire world trajectory; only it was far more nefarious and misunderstood by economists, in particular, who had decided, while this revolution was occurring, they had learned everything worth knowing. One of the few great ironies of secular stagnation that is somehow comforting if still also infuriating is that the eurodollar standard, the world’s true reserve currency this last half century or so, will likely end before anyone even knows it was there. That includes all the world’s monetary experts.

More harmful than all the world’s monetary policy disruptions (more so on expectations than in actual money), all of increasing sizes and doses, has been the far larger and more relevant “dollar” impositions. Stop the “dollar” and there will no longer be any need for intentional disruptions of further negative factors (either more inflation or the utter waste of government spending). Business can go back to the business of business, as it is supposed to be, rather than being concerned about the “rising dollar”, the falling dollar, or whatever else some economist might think up to fill in as a deus ex machina in the absence of monetary competence.

Alhambra Investment Partners

19 Comments on "The Coming Era Of Depression Economics"

  1. penury on Sun, 29th Jan 2017 5:09 pm 

    The fact that the energy component of the economy was inexpensive and readily available might have had something to do with the equation. WWII did have one thing to do with the U.S. economy, the fact that most of the productive capacity of the rest of the world was destroyed certainly led to the rapid expansion of exports of all types around the world. This lasted until first the Japanese then he other nations started producing at much lower costs. That was when U.S. Corps made the choice that low cost manufacture combined with high price selling was the way to go. China finally woke up some Americans but, not the economists . Bretton Woods destroyed the last of the real money.

  2. makati1 on Sun, 29th Jan 2017 5:14 pm 

    In plain words, the “economist” witch doctors are out of sheep guts and chicken bones to read. This article is nothing more than a spewing of verbal garbage, saying nothing. Not one word about the real cause of the decline/depression. The end of cheap, plentiful, high net energy. They are correct in seeing the depression. The fact that it will not end this time still eludes them.

  3. onlooker on Sun, 29th Jan 2017 6:00 pm 

    Besides being worthless in not highlighting the limits to growth underlying reasons for our woes as a species. I detect in this article an appeal to get the Central Bank ie. Govt. out of the Economy. So more of the oh if we just deregulate and let that benevolent hand of Capitalism steer us the right way. Crud Hopium

  4. Hubert on Mon, 30th Jan 2017 4:26 am 


  5. Davy on Mon, 30th Jan 2017 6:11 am 

    Hubert AKA wants a donation

  6. Revi on Mon, 30th Jan 2017 7:29 am 

    We are going to have to figure out another way of having an economy. I think a lot more will be done with barter, and there will be a lot less real money around. It’s going to look like a depression. Wait… it already does.

  7. Davy on Mon, 30th Jan 2017 7:44 am 

    “How Long Can China’s Debt Continue To Grow Before A Systemic Crisis Strikes?”

    “Nearly three years ago, Morgan Stanley may have jumped the shark (a little) when its strategists Cyril Moulle-Berteaux and Sergei Pimenova declared that China’s Minsky Moment has arrived. While that may have been partially true, the fact that China managed to incur an additional $12 trillion in total debt in the interim period, suggests that Beijing at least managed to postpone the inevitable. And since in the 3 years since little has changed, questions about how much longer the Chinese debt-fueled growth “farce” can continue have once again emerged, in their latest incarnation courtesy of UBS, whose economist Tao Wang asks “How long can debt continue to grow before a Minsky moment or systemic debt crisis?”

    “China’s debt is set to rise further in the coming years, likely exceeding 300% of GDP within 2 years. As the government continues to rely on credit-fuelled investment growth to offset downward pressures within the domestic economy and from a subdued global environment, unless there is major debt restructuring, China’s debt/GDP ratio is set to rise further. We don’t think that there is a “magic” level at which a debt crisis will take place. Many countries ran into debt crises at levels of debt significantly lower than China’s current level, often because debt was financed by foreign resources due to low domestic savings, and/or because of duration mismatch (Figure 11).”

    “The fact that debt is rising much faster than output year after year and an increasing share of debt is allocated in nonproductive or excess capacity sectors means misallocation of resources. Such systematic misallocation will depress long term productivity and economic growth, and wasted resources mean more potential bad debt will be created. While the aforementioned unique factors can allow China’s credit cycle to last much longer than in other economies and with less volatility, this lack of a market-clearing mechanism could depress corporate profitability and investment, leading to lower or stagnant economic growth over a prolonged period of time. Eventually, the cost of accumulating so much bad debt will have to be borne by the financial sector and savers, asset prices will have to correct, and the ultimate cost of adjustment may be substantially larger.”

  8. Davy on Mon, 30th Jan 2017 8:33 am 

    The real reason Tech CEO’s are pissed and economic nationalism:
    “Why The Cold War Between Tech CEOs and Trump Is About To Go Nuclear”

    “That may be, but the biggest reason for the anger by tech CEOs at the Trump administration is a simple, and a more selfish one. The reason for the simmering cold war between tech CEOs and Trump can be summarized in just three letters: H1-B. The bottom line is that tech CEOs fear Trump will single them out for outsourcing jobs or shut down the so-called H-1B visa program they use to hire high-skilled foreign employees for crucial engineering and technical jobs.”

    “Our country’s immigration policies should be designed and implemented to serve, first and foremost, the U.S. national interest,” the draft proposal reads, according to a copy reviewed by Bloomberg. “Visa programs for foreign workers … should be administered in a manner that protects the civil rights of American workers and current lawful residents, and that prioritizes the protection of American workers — our forgotten working people — and the jobs they hold.”

  9. paulo1 on Mon, 30th Jan 2017 9:34 am 

    Why do economits always fail to add in the cheap energy with high eroei? They really are usesless, aren’t they?

  10. Bob Smith on Mon, 30th Jan 2017 12:14 pm 

    For the last fifty years tax dollars have been used to further the PC crowd. Immigration welfare assistance and various other wasted spending have been killing America. Twenty trillion dollars of debt and half the country is protesting America isn’t doing enough. Yes it is going to continue to go down hill. Look at the shape Europe is in. The socialist are losing ground because of the governments wanting to take in everyone and furnish them everything at taxpayer expense. America has made it clear. Why do you think Trump is where he is today. America has been made stupid and ever more demanding. Why don’t the protesters have all the refugees move in with them. Twenty trillion dollars ? just who do these socialist liberals think are going to pay for this coming train wreck.

  11. Cloggie on Mon, 30th Jan 2017 12:23 pm 

    just who do these socialist liberals think are going to pay for this coming train wreck.


  12. HopeToRetire on Mon, 30th Jan 2017 1:40 pm 

    So what is the average person to do? How should they save for the future? I would prefer insight from an economist or the author, not some internet doomsday commenter.

  13. Bloomer on Tue, 31st Jan 2017 12:10 am 

    When consumers (workers) no longer can afford the goods and services they provide, you have a slow down in the economy. As a countermeasure, the workers (consumers) borrow to purchase those goods and services. Keeps economy afloat.

    As (consumers) workers wages continue to erode, the Federal Reserve lowers interest rates, to keep them spending. Now, with interest rates at all time lows, (negative rates in some countries) and consumers (workers) maxed out in borrowing-the gig is up.

    Low oil prices gave the workers (consumers) a reprieve. But that too is coming to an end. This is depression economics and its going to get a lot more dire fellow bloggers.

  14. Davy on Tue, 31st Jan 2017 4:36 am 

    Meanwhile across the Atlantic Europe is dissolving into a sovereign debt goo.
    “Another Greek WTF Showdown Moment Explained”

    “This is one of those WTF moments where statements from Greece, from the IMF, and also the Eurozone make no apparent sense. Yet, despite the obviously apparent nonsense, it’s possible to piece together what’s happening.”
    “1 Neither Germany nor the Netherlands is willing to throw Greece the smallest of bones for fear of election consequences. It’s far easier for Eurozone nannycrats to pretend things are running smoothly.
    2 Schaeuble has long wanted Greece out of the Eurozone. But Germany does not want to take the blame. Instead, Schaeuble wants the IMF or Greece to take the blame.
    3 The IMF does not want the blame either, so it takes a preposterous stance that the debt is not sustainable but a 3.5% primary account surplus for as far as the eye can see is sustainable. The IMF takes this view despite having argued many times that 3.5% is not sustainable.
    4 By pretending to now be in favor of 3.5% perpetually, the IMF can argue it is not one-sided to Greece.
    5 Despite the fact the IMF is more on Greece’s side than Germany or the Eurozone nannycrats, Greece hates the IMF so much that its position of not wanting the IMF involved overrides common sense.
    6 As an alternative to point 5, consider the possibility that Greece wants outs of the Eurozone, but none of the politicians want to take the blame. Instead, the politicians want to blame the IMF or Germany and are just itching for the IMF to get the hell out so they could do what they wanted to years ago (exit the eurozone). In this possibility, Greece looks to place the blame elsewhere and is waiting for the right moment.”

    “Troika Blame Game Theory”
    “Points 1-4 are certain. Points 5-6 are pick one. Despite the apparent absurdity of conflicting views and the IMF’s changing stance, blame game theory explains all you need to know. Here is a shorter synopsis.”
    “1 Greece wants to blame the IMF and Germany
    2 Germany wants to blame Greece and the IMF
    3 The IMF wants to blame Greece and Germany”

  15. Davy on Tue, 31st Jan 2017 6:54 am 

    “The European Trade Wars Begin: Trump Trade Advisor Accuses Germany Of Using “Grossly Undervalued” Euro”

    “The Trump administration just fired the first shot in the US-European currency, and thus trade, wars when Trump’s top trade advisor Peter Navarro accused Germany of using a “grossly undervalued” euro to “exploit the US and its EU partners”, the FT reported noting the comments are “likely to trigger alarm in Europe’s largest economy.” News of the statement sent the EURUSD surging and the dollar tumbling to fresh 2 month lows.”

    “A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued,” Mr Navarro said. “The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity [diversity] within the EU — ergo, this is a multilateral deal in bilateral dress.” The comments highlight a growing willingness by the Trump administration to antagonize EU leaders and particularly Angela Merkel, the German chancellor. Besides publicly supporting Mrs May’s government in its negotiations with the EU over the terms of its exit, Mr Trump called the EU a vehicle for Germany, and Nato an obsolete alliance.”

    “In further bad news for globalists, Navarro said one of the administration’s trade priorities was “unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.” “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” he said. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

  16. Davy on Tue, 31st Jan 2017 8:14 am 

    Well put Frau Merkel!
    “Merkel Responds To Trump Trade War Charge”
    “Following Peter Navarro’s accusations of German manipulation of the euro (and the surge in the EUR relative to the USD), Angela Merkel has responded by explaining implicitly ‘it’s not my fault. Noting that she “can’t change the situation with respect monetary policy” (so blame Draghi), Merkel added she “doesn’t want to influence the euro exchange rate.” EURUSD is dropping a little on her headlines.”

  17. Cloggie on Tue, 31st Jan 2017 8:31 am 

    The enormous German surpluses are a result of German ingenuity and discipline and was always the envy of the lesser Gods in Europe, notably Britain and France, who had dominated the scene for centuries. WW1 was a direct consequence of the resentment of being out-competed on world markets.

    And now America comes to the same conclusion, although it is unlikely that Trump will begin a shooting war against “made in Germany”.

    US trade with the rest of the world:

    This is not sustainable and the result of globalism and free trade, which was very good for countries like Germany and China, but for the rest not so much. The goal must be to balance bilateral trade relations as much as possible. And yes Germany must import more and/or export less. China same story. In the German case there should be a government propaganda program that tells German woman not to place such great value on careers but concentrate on having children instead. this will require a lot of measures (tax laws, marriage laws) that would encourage such a development. Putin did something similar and it worked.


  18. joe on Tue, 31st Jan 2017 1:35 pm 

    Foolish cloggie. Germany is genius as usual. Cheating emissions and fraudulent banking system. How many times has German banks been fined in 2016/17? Yup Fraud Markel the childless former Communist bloc lover once again showing her class. The strong euro is the reason German industry can buy up cheap inputs globally and its socialist/unionised economy has bought enough industrial peace for Germany to make out like theives in the night. In a weird way, Germany is now what Trump wants America to become again (just not the socialism and unions). The EU has forced Europe to close most of its industry because they cant compete they were forced to sell off their state bodies and unionised industries in the name of market liberalisation. Its all a big scam by the rich in all of the EU. The people are on to them, Grexit showed us Um Merkels true colors, Brexit will lead the way from now on. Good luck sucking Putins dick in Brussels.

  19. Cloggie on Tue, 31st Jan 2017 1:45 pm 

    Good luck sucking Putins dick in Brussels.

    I was more thinking about rolling back 1945 and restore 1492-1914 normality, meaning Europe being the first address again on this planet, undoing the Anglo-Soviet disaster. Should be piece of cake with 640 million and nuclear armed to the teeth.

    Sucking dicks is for others.

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