About this Blog
The crisis in the global economy is a crisis of imbalances. The fundamental imbalance is that between global supply and global demand, with global demand limited by the income and purchasing power of the individuals who comprise the world’s population. This imbalance developed when governments began “creating” money after the United States destroyed the Bretton Woods international monetary system in which money had been backed by gold. When the link between money and gold was broken, an explosion of credit brought about an unprecedented expansion of industrial capacity around the world. For decades an equally astounding growth in consumer credit permitted the surging industrial capacity to be absorbed. In 2008, however, consumers buckled under their debt, defaulted and were cut off from additional credit. Between 2008 and 2010, governments succeeded in absorbing global excess capacity by borrowing, creating and spending the equivalent of trillions of dollars. Should governments fail to continue to plug that gap, global supply will contract in a downward spiral of bank failures, factory closures, job destruction and deflation in a process replicating the Great Depression.
Only within this context of the imbalance between global supply and global demand can this crisis, the worldwide policy response to it, and the forces driving the relative value of all asset classes be understood. This blog will build a comprehensive framework for understanding the imbalances that have brought the world to the brink of a New Great Depression. It is my belief that understanding will lead to reform and that reform will deliver sustainable prosperity.
Below please find an outline of the topics to be addressed in this blog.
THE GLOBAL ECONOMIC CRISIS: PAST, PRESENT AND FUTURE
I The Past: Abandoned principles and misguided policies
- Unbalanced Budgets
- The End of Sound Money
- Promoting Trade with no concern for the balance of trade
- Financial Sector Deregulation
- Economic Management through bubble creation.
- The collapse of Bretton Woods
- Trade Imbalances
- Flaws in The Dollar Standard: no automatic adjustment mechanism.
- Globalization: trade imbalances, disinflation, interest rates
- Financing the trade imbalances with paper money creation
- Free Trade was good; Debt Financed Trade is bad
- Capital Inflows caused economic bubbles in the surplus countries
- Capital inflows caused the economic bubble in the US
- Credit growth drove economic growth in the US
- How credit creates the bubble: the mechanics of a credit bubble.
- Why bubbles pop.
- Capital flows and banking crises.
- Economic management through bubble creation in the US
- Why are interest rates 0%?
- Quantitative Easing
- Capitalism becomes Debtism
- Debtism collapses; Statism fills the gap.
- Saving the Financial Sector
- Supporting Aggregate Demand
- The Corruption of Capitalism
- The Great Depression and The New Depression
- The conventional view of the causes of the Great Depression is wrong.
II The Present: On the brink of disaster
The Condition and Outlook for the global economy
- Personal Consumption
- Business Investment
- The bailout
- Financial Sector Reform
The global crisis is structural, not cyclical: America Doesn’t Work
Deflation: the Fed’s worst nightmare.
Global Wages Won’t Rise: A return to 1790? Insufficient distribution of income/wages.
Who benefits from Debt Financed Trade? Who loses?
The Policy Response: Saving Global Finance and Supporting Aggregate Demand.
III The Future: What Must Be Done
Understanding our starting point: the brink of disaster. The life raft analogy.
What caused the Great Depression?
- Cut government spending now
- Maintain current levels of government spending
- Increase government spending to restructure the economy
- Quantitative Easing: Economic management through money creation
The Bad Future: large budget deficits and eventual large scale monetization of the debt.
- Food riots
- The Fall of Rome
The Good Future: Restructuring America, Rebalancing the global economy
- Learning from Japan’s mistakes
- Large deficit spending is unavoidable when a great bubble pops.
- The deficit will be much easier to finance than expected.
- Don’t waste the money building bridges to nowhere.
- $3 trillion would resolve the crisis and lock in a new American Century
- How it could be financed:
- With the pool of bubble money plus cash flow (flow of funds); spare financial capacity.
- Making the most of the opportunities The Dollar Standard affords the US.
- Printing money as a last resort. Given globalization’s impact on wages and inflation it is possible.
- Creating miracles
- What’s good for America is good for the world.
A five to ten year window of opportunity exists to resolve this crisis
- The deficits can’t be financed forever. Budget outlook.
- Impediments to action
- Incorrect conventional “wisdom”
- Vested interests
- Muddled economic theory
- The loss of nerve
- Why we can’t go back the way we came. We are not starting from a laissez-faire Garden of Eden.
A call for reform
- What is the philosophy guiding US economic and political economy?
- Who benefits?
- Who loses?
- Budgetary reform
- Monetary reform
- Trade reform
- Financial sector reform: credit is dangerous
- Political reform
- Avoiding A Third World America
Policy tools for a new century
- A global minimum wage
- Government investment
IV INVESTMENT IMPLICATIONS
- What is Quantitative Easing?
- The most probable outcome
- A diversified portfolio
- Cash Flow: Make something and sell it.
ECONOMICS IN THE AGE OF PAPER MONEY
- The economic ecosystem, laissez-faire and exogenous shocks.
- Globalization and the collapse in the cost of labor
- Three kinds of Inflation
- Why Interest Rates are zero: What determines interest rates in the age of paper money
- Understanding the Flow of Funds
- The End of Crowding Out
- Quantitative Easing and Crowding In
- The US trade deficit: the driver of global growth
- Analysis of the US trade deficit. What could correct it?
- Free Trade vs. Debt Financed Trade
- Are trade tariffs inevitable? Who would be the winners and losers?
- How the government manages the US economy
- The evolution of US economic policy: 1945 to present
HOW MY VIEWS DIFFER FROM:
- Bernanke and the Monetarists
- Free Traders
- The Libertarians
- The Tea Party
- The Democrats
- The Republicans
- The Bulls/the optimists
- The Bears/the pessimists
- China Bulls
- China’s policymakers