July 19, 2010

Are We Inside a Great Depression?

There is much confusion in even the economics-following population about the current economic situation. Will this "recession" end? Is it just a deep recession? Should we cut back on federal spending? Richard Koo is good at explaining the actual (unusual) economic situation we are in. This is not what is understood as simply a deep recession (this is not like 1982) -- it is a different animal.

Koo explains some of the economics I illustrated in my recent post "The Savings Conundrum":

What is our real situation, and why the Fed alone can't reverse it (with any actions similar to those taken to date, and perhaps not even with broader or more extensive quantitative easing):

Roger Lowenstein lays out the big picture in more layman-like language in the NYTimes.

Throughout the Universe, and in our own Milkyway Galaxy, many black holes reside, sucking nearby matter and stars into their titanic masses. The point of no return for even light itself is called the event horizon. It is a radius beneath which light itself cannot escape the gravity of the black hole.

It appears we are at or just inside the event horizon of a great depression. Unlike Paul Krugman, I don't think this will be a "long depression" (long and shallow). Debt levels and world-wide frugality are sufficient to make this depression deep, or "great."

The key fact -- and why this incipient depression looks to be "great" -- is that practically all large economies are beginning to embrace frugality simultaneously. China is a huge saver to begin with due to culture (single children saving to support their parents and attract mates), and how could this culture change quickly? It will be many years before China begins to reduce its huge savings rate.

In short, without extraordinary measures, the world economy will spiral downward due to a savings-conundrum circular impoverishment. Of course, as this becomes more visible extraordinary measures will indeed be contemplated, and then enacted....

Only unconventional measures could propel us out of the normal gravitational result of worldwide, simultaneous governmental and household frugality.

I think we are heading towards extraordinary times and extraordinary new governmental responses. But....many won't comprehend the savings-conundrum, and will try to blame governmental spending for conditions -- similar to blaming your lifeboat for the sinking of the Titanic.

In the absence of extraordinary measures, the conditions that engender the rise of militant nationalism would arise, as they did in 1931-1933. Lest we forget, militant nationalism leads to aggression, and usually to war. Some wars become major wars. Major wars involve much deeper resources and a wider use of major weapons. That equates to a lot higher casualties. Millions of casualties are a plausible outcome.

Those are the stakes if no extraordinary economic measures are taken. We have taken extraordinary measures, both actions of the Fed and the Federal stimulus, and....more might prove necessary.

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