The “it” is secular stagnation, which seems to be the New New Thing or the new new normal: a way to describe the persistent state of subpar economic growth plaguing developed nations. Think of it as Japan’s lost decade gone global.
The diagnosis? Too much saving and a lack of investment opportunities, according to Harvard University’s Summers. And with the funds rate close to zero, the Federal Reserve can’t deliver the negative real interest rates he says the economy needs unless it creates higher inflation.
So what do Summers and Krugman advocate for the secular malaise? Why, a cyclical solution: government spending on infrastructure. They want the kinds of things Keynesians typically promote to stabilize the economy during a recession to become a permanent part of the fiscal architecture.
What’s not being talked about is why we have such a condition.
Why not? It’s obvious from this chart, isn’t it?
When looked at this way it’s obvious what happened: We pulled forward demand via more and more debt, yet the underlying demand level never accelerated to match it despite 30 years of the same thing!
In other words we ate tomorrow’s hamburger today, but failed to generate the need for a second hamburger. As debt (and thus interest costs) rose we simply borrowed more, but again, we failed to generate demand for more hamburgers and instead simply executed a continuing forward time shift.
That’s a very serious problem but it in fact has been going on for a long time.
That is, the marginal productivity of a new dollar of debt has been going down for decades.
How do we know this? Because the chart is right in front of you and this is the BEA’s and The Fed’s data on a simple plot!
All this borrowing has failed to lift the red line over the blue line on any sort of sustained basis.
That is the economic nostrum put forward and shoved down your mouth has never worked in modern history.
This is the problem with all of the so-called “prescriptions” from the financial industry, economic “pundits” and politicians. All of them rely on borrowing — that is, more debt — to fund whatever their particular tonic might be.
History says that no amount of such ever works to lift output on a durable basis and thus the common man’s standard of living. It may somewhat lift nominal GDP but the common man’s share of that GDP expressed in his pay always declines each and every time this occurs.
For those who say that I’m “cherry-picking” the last 30 years, can you identify the durable post-war increase in GDP that exceeded debt accumulation when I show you the entire series from 1953 forward?
As you can see there is no post-war period where this strategy — borrow and spend — has ever worked on a durable basis to lift living standards.
Not in the 1950s, 60s, 70s, 80s, 90s, 2000s, or 2010s.
Any such claim is a fraud and those who make such claims should be excoriated by presenting them with the numerical proof of their false claims, forcing them to eat the paper it is printed on. Those who continually press knowingly false claims such as this and manage to get them enacted as policy deserve to be prosecuted.
The cause of the problem we have today is excessive leverage, exactly as it was with Tulip mania, 1873, 1929, 2000 and 2008. The only question was exactly where the locus of that leverage (that is, debt) happened to reside for any particular bubble.
Post-war we got out of the Depression for two reasons: We blew to bits the entire developed world’s manufacturing capacity — save our own — and we killed millions of working-age, healthy young men on a world-wide basis thereby reducing competition (dramatically!) for jobs.
If I destroy all of my competitors’ plants by blowing them up I am obviously going to have both increased demand for my products and pricing power. If I kill the surplus workers then unemployment will drop as well, dramatically reducing demand on social services.
When both happen at the same time my economy booms — for a while.
What we failed to learn from the 1920s and 30s is why the imbalance came about in the first place. In the 1920s we did the same thing with “creative financing” that we’ve done since — we permitted unbridled and unbacked private credit creation despite a mandate in the Federal Reserve Act to control same, we refused to throw in jail (or boil in oil) the Federal Reserve members when they failed to discharge that responsibility and instead intentionally participated in doing the exact opposite, and the resulting bubble and bust gave us the Depression.
The irony is that The Federal Reserve was formed precisely because of the “Long Depression” (kicked off in 1873) resulting from exactly the same problem — a recognized malady The Fed was allegedly supposed to prevent!
Then we learned exactly nothing from the second instance of the same nonsense within 50 years, trying all the things that Summers and Krugman have been advocating for and which did not work — we spent another decade in misery in the 1930s as a consequence.
But the worst part of it is that 1920/21 showed us that if instead of “pumping liquidity” The Fed did its job and prevented attempted credit expansion even a catastrophic collapse in industrial production and demand would sort itself out within months!
Of course things came to a head politically as we went into the 1940s and we wound up in a war that killed millions and destroyed the manufacturing base of the entire developed world — except for the United States.
Perhaps some would like to see the same “solution” this time around. I suspect Barry Soetero is among them, as are Ben Bernanke, Krugman and Summers.
But I’m not.
Leaving aside the insanity of starting a World War in the nuclear age, we know factually that there is another path what works. Specifically, we know from 1920-21 that pulling liquidity instead of increasing it clears the market and restores economic health within months.
The actions of these jackasses are no accident — they’re intentional and their expressed and well-documented intent is to destroy you, the common man.
For how long are you going to allow this to continue?
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