Depression Politics

Are we about to plunge into depression? We could. Very easily. If the policy makers get their way. Nothing could be more ludicrous or dangerous than easing up on stimulus right now. Yet the folks who run our economic policy, and their counterparts throughout the large economies, are openly discussing the ways in which they can start to pull back or reduce their respective stimulus packages. We should all hope as fervently as we can that they do not pull back. That is the way to full throttled depression.

Nothing could be more dangerous to the health of our economy. Nothing. Even the most cursory reading of history tells us that those who have made premature moves to downscale the policy support for an economy in the kind of danger ours still is doom it.

The potential folly is stupendous.

Paul Krugman argues the case succinctly this morning. The risks to recovery are all on the downside. There are no obvious dangers stemming from stimulus. In fact the stimulus has hardly begun to work yet. Any discussion of its ‘failure’ is patently absurd. We are four months into a three year cycle. Yet already the administration is showing its timidity in the face of growing and concerted criticism from its opponents. It is beginning to ‘walk back’ some of its ideas.

All those gardening metaphors have addled the brains of our commentators and analysts. They are breathlessly intoning about ‘green shoots’ as if the recovery is both imminent and robust. They forget that one sharp frost and the whole thing shrivels instantly. And there are abundant signs that frost is likely: the outlook for world trade is bleak to put it mildly, which removes the traditional engine of growth for economies in our situation.

There is a particular misreading of the bond market. I have complained about that before. In summary the mistake that is now pervading the commentariat is that rising bond rates are bad: they demonstrate the market’s ‘fear’ of future inflation. That inflation, it is alleged, stems directly from the huge stimulus flooding the money supply. This is an incorrect reading of the situation. The diagnosis would have credibility in an economy running at or near capacity. Ours is so far from that condition that I am shocked anyone would suggest inflation is a near term threat. The danger from this misdiagnosis is massive. The increased money supply is what is preventing the economy caving in totally. It is providing demand to offset the collapse of private demand. More to the point: even with all this government borrowing the aggregate of state plus private borrowing is less, not more, than it was before. We have a dire excess of savings. People are unwilling to invest or spend. There is no risk of inflation while that circumstance continues.

So let me be unequivocal: the only thing standing between the US economy and full bore depression is active ‘interventionist’ fiscal policy in the form of continued government deficit spending; aided and abetted by ‘unconventional’ monetary policy. Cut back that and you cut away the only legs we have.

Why is this?

Because the economy has fallen into a classic liquidity trap. Conventional anti-recessionary policy – lowering interest rates etc – has no effect. Interest rates are so low they cannot go lower. The economy failed to respond as rates were dropped. We were left with no choice but to break out all the old Keynesian tricks.

The folks who are now talking about the ‘failure’ of the stimulus, or the fear of inflation, and even the corruption endemic in the stimulus, are all driven by a political rather than an economic agenda. They are mounting a last ditch effort to subvert the emergence of a revived Keynseian economic regime. They fear the success of the policies in place because such success would present a stark indictment of the policies of last three decades.

Either that, or they are hopelessly and naively infested with a short term view that prevents them from learning from history.

Then again the mentality that dominates the bond market is the same that brought us the bubble. That alone should tell us we ought to ignore it.

I hope my hyperventilating is an over reaction to the chatter in the financial press. But the hopeless performance of Joe Biden this weekend – where he defended the apparent ‘failure of the stimulus’ – has given me cause for concern.

We are a very long way from safety. Now is not the time for a return to depression politics.