Let us start with an excerpt from a talk by the historian Neall Ferguson at the PEN/NYRB Modern Depression Symposium on May 22, 2009.
“You’ll notice how psychological terms are very helpful when economics fails as a discipline, as it clearly has. So we retreat into the realm of psychology. After the repression, the breakdown, we came out of denial, and we realized that probably more than one major bank was insolvent. In September and October, the world went into shock. It was deeply traumatic.
“Now we’re in the therapy phase. And what therapy are we using? Well, it’s very interesting because we’re using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman, Milton Friedman that is, and that’s the therapy that’s being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the early 1930s. I’m fine with that. That’s the right thing to do. But there’s another course of therapy that’s simultaneously being administered, which is the therapy prescribed by Dr. Keynes, John Maynard Keynes, and that therapy involves the running of massive fiscal deficits in excess of 12% of GDP this year and the issuance therefore of vast quantities of freshly minted bonds. Now you know there is some medicine in your drugs cabinet at home that has passed its sell-by date, and I rather fear that, at the risk of provoking the man sitting on the other side of me, that it says 1936 on the bottle of Dr. Keynes’ medicine.
“Why do I think this? Because there’s a clear contradiction between these two policies and we’re trying to have it both ways. You can’t be a monetarist and a Keynesian, simultaneously. At least, I can’t see how you can. Because if the aim of the monetarist policy is to keep interest rates down, liquidity high, the effect of the Keynesian policy must be to drive interest rates up. After all, 1.75 trillion dollars is an awful lot of freshly minted treasuries to land on the bond market at a time of recession. And I still don’t know who’s going to buy all this stuff. It’s certainly not going to be the Chinese. That worked fine in the good times. But what I call Chimerica, the marriage between China and America is sort of coming to an end, maybe it’s going to end in a messy divorce.”
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News Report
Barack Obama has warned against cutting national debts too quickly as it would put economic recovery at risk.
In a letter to G20 leaders, the US president said that while it was important to put in place “credible plans” to cut deficits, withdrawing economic stimulus early was dangerous.
“[In the past] stimulus was too quickly withdrawn and resulted in renewed hardships and recession,” he warned.
But Mr. Obama said the US would still aim to halve is own deficit by 2013.
The US budget deficit would be cut to 3% of GDP by 2015, the President said.
The leaders of the world’s 20 leading economies are due to meet in Toronto on June 26.
Mr. Obama said the priority of the meeting should be “to safeguard and strengthen the recovery.”
The BBC World Service’s economics correspondent, Andrew Walker, said the letter appeared to express the US administration reservations over recent changes in economic policy in Europe.
“There has been a marked change in emphasis in the G20 in the last few weeks,” he said.
“For many of the group’s member countries, especially in Europe, the case for stimulating economic recovery using the public finances has been overtaken by concerns about stabilizing government debt.”
The governments of several large European countries, Germany and the United Kingdom among them, have recently outlined plans for spending cuts.
The G20, which includes both developed and developing economies such as Russia, China and Argentina, has taken the lead in efforts to tackle the global financial crisis.
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Whom will the G20 leaders pick – Dr. Friedman or Dr. Keynes?
Dr. Keynes prescription is very expensive; it will take a long time to pay the bill. But the economy will revive. Dr. Friedman is cheaper, but in the short and medium term his treatment adds to the suffering of many. One hopes the G20 leaders choose a balanced approach.
Through my connections (which I cannot disclose) I have conveyed your hopes to them. Thank you.
It appears your conveyance of my hopes fell on deaf ears.
From today’s Globe and Mail:
Krugman: A depression is coming
David Berman
Who knew that Paul Krugman, the economist and New York Times columnist would emerge as a voice of doom? Mr. Krugman, who has recently been arguing the necessity of continuing stimulus spending at a time when the global economic recovery is weak, is – to put it mildly – disappointed by the G-20’s commitment of deficit reduction.
Indeed, he believes the world is now at the threshold of an all-out depression with spending cutbacks coming at the worst possible time for the economy.
“Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline – on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses,” he said in a Monday column in the New York Times.
“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world – most recently at last weekend’s deeply discouraging G-20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”
It will be interesting to see which way stock markets go on this development. So far on Monday, in mid-morning trading, indexes seemed to be reflecting a giant shrug on the part of investors, with stocks little changed.