The Third Depression is coming: Krugman

21st century depression closed factory

21st century depression closed factory

“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.” — Benzinga

That’s what Paul Krugman says is on the horizon.  In a sobering article in Sunday’s NY Times Mr. Krugman says policy errors are leading us right off the cliff:

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.”

Regular readers know my position.  I never thought the secular bear ended or that the credit crisis was over.  This has become abundantly clear as unemployment has remained stubbornly high and the credit crisis evolves into a full blown sovereign debt crisis.  The recent evolution of the Greek crisis and scare mongering of certain market participants is almost certainly walking us off the edge of the cliff.  Policymakers have misdiagnosed this crisis from the very beginning so it’s not surprising to see them continue down this same path.

china usd trade debt graph

It’s unfortunate that this is all unraveling with Greece at the epicenter.  Policymakers have utterly failed in understanding that the Euro currency system is fundamentally different from the others around the globe – specifically in Japan, UK and USA.  We’ve all become convinced that we are the next Greece (which is utterly insane).  The Euro crisis is staggering and beyond frightening in my opinion.  As I have maintained for years there is no true fix in Europe that doesn’t include full unity (a United States of Europe – which is impossible) or partial or full restructuring (full restructuring is inevitable in the long-run in my opinion).  There is no bailout that can fix the inherent flaws in the single currency system.  It is destined to fail in my opinion.  That’s a terribly frightening thought and the Euro’s death might very well be on our doorstep.  A swift death would be preferable in my opinion.  Unfortunately, I see this crisis playing out for a very long time as politicians hang on to their Euro baby for as long as possible.  The first step in rehab is always admission.  We’re not even there yet.

Sometimes this feels like a terrible dream to me.  It’s as if we are reliving the gold standard days all over again when countries realized the inherent restraints imposed on their nations via this foolish currency system.  Many are arguing that austerity is the only way out of the Euro crisis, but austerity is already proving futile in countries that have undergone austerity measures.  Exhibit A is Ireland where their budget deficit continues to expand.  The same will occur in Portugal, Italy, Spain and Greece where austerity measures are in the works.  Unfortunately for the Europeans this is a currency problem and not just a budget problem.   Europe appears doomed in my opinion unless a true currency fix is implemented.  That alone could bring us all to our knees.  Unfortunately, the problems don’t stop at the borders of Europe.

The Japanese, in fact, did exactly what the current US administration says it is doing. They kept their budgets balanced, maintained a tight monetary policy, and waited for the market to finish correcting itself. However, here’s the thing: it didn’t. They waited so long before doing anything that demand just died, and without lower interest rates spurring investment and without a devaluing currency encouraging exports, it continued to die. Only when the Japanese dropped their interest rates, spent huge amounts on public works to increase demand, and – and this is where i think we can both agree the US has gone wrong – let failing banks fail, only then did Japan emerge from a decade of stagnation.

The mistake the Fed and the US gov is making is not their expansionary monetary policy, which is needed to spur short-term demand and also to devalue the dollar a bit so US exports are more attractive, nor is it their stimulus. Those policies are meant to smooth out a recession, to make the peaks less high and the valleys less low, and they did this job quite well for decades.

It is three things: stupid deregulation, crony capitalism and corporate welfare on an epic scale, and Alan Greenspan’s policy of leaving interest rates ridiculously low, even in boom times, that caused this recession, and it is the first two that are going to make it worse.

2 thoughts on “The Third Depression is coming: Krugman”

  1. There is no ‘absence of jobs’, only a surplus of people in relation to the livelihoods on offer. The equation has one variable, i.e. the number of people.

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