“On the Edge” Paul Krugman

339415~Christ-of-the-Abyss-Statue-Pennekamp-State-Park-FL-Posters "…Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners."  Paul Krugman


"Do not stare too long into the abyss lest the abyss take notice of you…"  I "improved" that a little, but…

A000120a The abyss seems to have noticed us.  I watch too much 24/7 news, particularly the business channels.  I have it running in the background while I work.  After a while a cumulative impression grows that Krugman is right and that we do stand on the edge of the abyss looking down into eternity.  Rothko painted the feeling in that scene.  Actually, he painted it over and over again until it killed him.

A total collapse is a possibility, a collapse of everything; the economy, the social order, government authority.  How high does unemployment have to rise in a country full of people raised to believe in their "right" to instant gratification before the restraints that protect the "rights" of wallstreeters to their undeserved bonuses seem trivial things?

The Republicans do not want to spend money uselessly?  They may wish soon that the money they saved would buy something, anything.  I lived in occupied Germany as a child.  Our father was one of the occupiers.  I remember the Germans when they had wheelbarrows full of Reichsmarks.  Only the intervention of the victors revived their fortunes.  Who will revive ours?

I am not sure that President Obama's stimulus package will do what is hoped.  The idea seems a kind of half-assed Keynesian notion that dumping a lot of money into the economy will jump start the patient.  The image of Barack Obama with the paddles in his hands is distracting.  I surely do hope that will work.  If it does not, then we should all look to our situations.  pl


This entry was posted in Current Affairs. Bookmark the permalink.

52 Responses to “On the Edge” Paul Krugman

  1. Jose says:

    “he who stands greatest, stands alone.” – can’t remember the source or find it in the google
    Since American has stood as the greatest country in the world: maintaining an Empire, unilateralism, massive tax cuts, sending millions of jobs overseas, defending countries that are not in our interest, reforming Islam, bringing Democracy to the Middle East, etc.
    We now find ourselves all alone, no one is coming to help us.
    Will the stimulus package work?
    Will the coming Health Care reform work?
    Will the Military need retooling after Iraq?
    War with Iran?
    I think we are beyond the Abyss, we need to focus on what is in America’s best interest and what we can afford.
    Also, apply that to your own situation because IMHO, no one in Washington has a clue.

  2. J says:

    One of the difference today versus the 1929 depression era, is that today less than 10% of the nation have the ability to feed themselves. At that time in cities there were block milk cows, chickens, and gardens in the big cities.
    If big oil went ‘gulg’ and the gasoline/diesel dried up, how many would be able to hitch a team of horse/cows together for a buckboard or wagon? I remember my father talking about how he and his family traveled with a wagon pulling a milk cow in tow.
    What cities and towns need to do is work togeather to feed each other and take care of one another as one big extended family. After all, we are Americans and historically we pull together in times of distress.
    Flour, our forefathers many of which did not have access to wheat, but did have a potato garden. Potato flour makes a tasty bread.
    A horse provides many ‘comforts’, one can pull a buggy, or small buckboard in addition to letting you ride on its back. And the ‘end result’ of the horse’s feed bag, can heat a pot belly stove.
    And if you have a mare with a foal, the foal won’t mind sharing its milk if you don’t get carried away. The Mongols still milk their mares as well as their cows and goats.

  3. As a regular reader of Krugman’s semi-weekly NYT column and his blog at the same venue, he comes through loud and clear that what President Obama proposed initially was likely inadequate, and that the package has been negotiated downward from there.
    A couple of days ago a friend who is a state legislator here sent me a link to a video entitled “Crash Course”, which is a presentation on the crisis the author, Chris Mortenson, believes the world, and this country with it, will face in the not too distant future, and what each of us can do to prepare for it. Having been a close observer of the energy businss during my career, as well as being afflicted with the curiosity to stick my nose into numerous other things over the last half century, I find his views entirely plausible. I believe that the “Crash Course” video, which takes 3+ hours to view in its entirety, is an abridgment of a longer seminar that he gives in person. I strongly recommend it. You can find it here: http://tinyurl.com/66vzgt
    You can read about the author and find out more about what he hopes to achieve by clicking on “About” at the link.

  4. frank durkee says:

    Col. Take a look at a Krugman Blog at the NYT last week on the differential between the US potential production and the actual production. The stimulous according to him is meant to fill the hole between the two. His view as I recall is that the House bill amounted to about one half or slightly less of what was needed. Less than enough tends, as he sees it, to fail and move us toward a deflationary situation. Add to that the disparity between the number of jobs created by direct spending and tax cuts [roughly around 1/2 as many ] and the recent politics in D.C. is almost criminal.

  5. frank durkee says:

    I love Rothko and the one you picked is perfect fo that post.

  6. Jim & Dog says:

    Until global weather modification becomes a transparent topic there will be no trust in our stock market, banks or Government. When the public can’t make reason of the weather extremes it just adds to uncertainty. With common sense I figured it out and now have shadows 24/7. So much for “Free Speech”.
    PL— Thank you for sharing your World experiences with us, I and the World are better for having read them over the years.

  7. alnval says:

    Col. Lang:
    My only disagreement with your assessment is your last sentence.
    To me, your suggestion that if we do fall into the abyss that we will all need to “look to our situations” carries with it the awful implication that the only result will be total anarchy with every man for himself.
    At an intellectual level, I can’t afford to agree with you. At an emotional level, however, I worry that you may be right.

  8. Mongoose says:

    Maybe it’s not a completely accurate comparison, but Thomas Kuhn’s notion of a scientific “paradigm” may capture some of what’s going on here. In general I don’t favor reductionism; however, I’m going to be reductionist, i.e, the notion of an old versus new paradigm might be an appropriate way to describe how House & Senate Republicans (I’m not exempting the Dems either) (mis)understand our current economic situation. To simplify: Kuhn argued that scientific revolutions occurred when scientists working in an “old” paradigm kept puttering around trying to solve questions that had pre-occupied them for years–they continued to answer questions but some answers eluded them precisely because that paradigm blinded them to the fact that some questions couldn’t be answered in it. The pieces of the puzzle not yet in place didn’t correspond to the remaining pieces not yet fitted together. Then along would come some young scientific whiz(zes), unbeholden to the old paradigm, who would generate a new paradigm that answered the old questions previously left unanswered and, by the way, left lots of work to be done putting together the puzzle of the new paradigm. (Example: Newtonian Mechanics vs. Eistein’s General & Special Relativity).
    Perhaps something vaguely similar is underway now not only amongst our politicians but many economists who practice the dismal science. I’m clearly not bright enough to know if a new economic paradigm is emerging but it seems clear enough to me that the Republican paradigmatic mindset–oops, I mean “solution” (tax cuts, tax cuts, & more tax cuts) is not the answer. Perhaps spending in the Keysenian mould isn’t the answer either, but it really hasn’t been explored as an option much, if at all, over the last 30 years. Maybe we need Keysenianism on steroids right now, I don’t know. I would wager, however, even though I’m an economic incompetent, that splitting the difference, as the so-called Senate moderates did yesterday is no solution to our current dilemma.

  9. FB Ali says:

    Chris Hedges sees something similar happening. See

  10. Cieran says:

    Excellent analysis, as always.
    My $0.02 worth is that a lot of what we cherish about our country (and perhaps ourselves) is not necessarily going to come out of this mess alive. We’re still heading in too many wrong directions (e.g., empire, exceptionalism, partisanship) to make the changes we need in the diminishing time remaining for us to make them.
    I believe that things are going to hell in a handbasket at an increasingly rapid rate. My favorite indicator of how rough it’s getting out there is that only a couple months ago, my e-mail spam filter used to catch tons of spam advertisements for cialis and viagra — and now it’s chock full of ads for prescription anti-depressants and sleep aids instead.
    Well, at least the spammers are paying attention to the zeitgeist… but will Congress?

  11. rcthweatt says:

    Over the past two weeks, I nave seen a sharp drop in road traffic in and around NYC; the long lines of tractor trailers waiting to cross the George Washington Bridge going north on I-95 are gone; Friday afternoon rush hour was like a Sunday. I have never seen anything like this- it is eerie, frightening-it implies Krugman may be wrong, we’re not on the edge, we’ve just gone over it.
    Worrying about the deficit right no is like worrying about the water bill in the middle of a fire. Standard(empirical) macroeconomics, history, and common sense all tell us the stimulus is too small, that Senators Nelson, Collins, and(alas)Webb have made a serious blunder-one they may soon be forced to correct by their hard-pressed home States. It should be obvious that, at the very least, State and local gov’t must not be forced to cut services and employment or raise taxes; yet the Senate has just cut $40B from the States. What we have here is a failure to imagine how bad things can get. We boomers grew up in the safety of the New Deal, which was specifically designed to prevent Depressions. We got rid of a lot of it. We were fools.

  12. frank durkee says:

    Mongoose. There was a paradigm shift with the development of Milton Friedmans point of view and the so called Chicago school. Essentially it posits that the “market” is virtually always a better allocator of capital and resouces than the government, that regulators not only distort the : Greenspan. Combine that with the hardcore Republican desire to dismantle the New Deal legacy and replace it with “the ownership society” and you have in brief the new paradigm. Add “government is the problem not the soloution” to complete it. So tax cuts and small government become the mantras.
    However when that paradigm’s apostle, Greenspan, admits that prudence did not keep the large institutions from violating their responsibilities and he i “shocked” by that you have a summary of what went wrong in the last few years. thus too great trust in mathematical models, new products, and exploitation of the opener regulatory enviornment and you have greed running to excess. You also have a failure to understand how we numans actuall y operate as contrasted with “the rational economic man” basis of traditional economic theory.
    you can reme,ber Adaam Smiths comment to the effect that when any two or more businessmen are gathered together they immediately seek to act against the common good and subvert it for their advantage.

  13. frank durkee says:

    See Krugman;s blog in the NYT today, Saturday, Under “Conscience of a Liberal” on the Opinion page for his further take on this.

  14. castellio says:

    Have you ever wondered why there is no American commercial shipping industry? I mean, world’s largest economy, oceans on both sides, trading nation.. How is it that Japan and South Korea are the largest builders of boats? They have few raw materials, expensive energy.
    Is it all just low wages? No, not anymore, not in those sectors of the Asian economy. Pretty comparable, actually.
    How about return on capital?
    Ahh, the American shipbuilders prefered working for the American military, where there are cost plus contracts that run without end. The commercial shipbuilders either became, or were bought out by, the military shipbuilders.
    And when the US government finally looked at the international trade imbalance in the shipbuilding industry, its enlightened conclusion was to insist that more work be done to sell American made naval vessels.
    So the cure to the trade weaknesses of a militarized society was to militarize other societies as well !!
    If the US can’t stare down its military, and can’t stop giving wasted money to its capitalist class, it can’t build up its economy. That simple.
    Unless it only wants to sell arms.

  15. I have been reading Sharon Astyk’s blog for a couple of years now.
    She has written one book titled Depletion and Abundance, and another on farming (for survival etc.) is forthcoming.
    She has been counseling preparedness for big, big disaster – economic and ecological – for years now. She is a peak oiler but you don’t have to believe the oil is running out to see the usefulness of many of the measures she recommends.
    Search within her site for articles on food storage, gardening, emergency supplies, and adapting to a much straitened economy. For a while I was saving my husband’s old blue jeans to cut down into new pairs for my sons come the Collapse, until we decided that it was weird to hold onto them. I don’t know, maybe I should have. Sharon keeps a houseful of second hand shoes and clothing etc. for her small, growing boys to use in later years.
    If I were fully healthy and fifteen years younger I would buy a nice homestead in a decent-sized college town in the eastern Midwest: Ohio, Indiana, maybe western PA. Someplace with enough rain fall, good water supplies, good soil, where the land and housing are cheap and yet there are still towns and roads and railroads. Maybe near the Erie Canal? Even Buffalo (or Syracuse) in its extremis is starting to make sense. I don’t consider NC, where I have lots of relatives and my mother owns property, because of the severe drought.
    However with my health issues, elderly mother & MIL, husband wedded to the Bay Area, I don’t think we’re going to be reverse pioneers. We’re going to shelter in place and take our chances in the Bay Area. It could get dicey. I trust in God.
    But I do have a goodly supply of staples in the cupboards, on Sharon’s warning. And if things get really bad, we can plant chard and sweet potatoes in the yard, install some chickens where the raccoons can’t get em. Guess if it gets REALLY bad we’ll be hiring the neighbors to shoot and stew the raccoons.
    I think we have a long way to go before we are trapping the local vermin for protein, or buying shotguns to keep marauders at bay, but I am indeed ready for almost any possibility.
    Meanwhile, I’ve been invited to a gala dinner at the public library and am going to go off and hobnob with the literati and moneybags of Berkeley, and eat and drink of the best wine and food available in our for-now abundant state. What economic crisis?

  16. Highlander says:

    “On the edge” my ass.
    “Staring into the abyess” Well let’s all do the Y2K panic syndrome all over again.
    I’m just a poor provincial business man without all the magical insights of NYC or DC. But I do have lots of my own dollars on the line in several enterprises.( some are OK, some (the real estate mainly) are locked up.
    Including the mid 80’s commercial real estate crunch this is the 8th one of these economic dust ups I’ve been through as an adult.
    In the 79 to 82 period interest rates stayed above 10% and topped at 19% inflation topped at 15%. In our current “staring into the abyess” situation long term interest rates are at 5% and inflation is 0 to 2%. Oil prices are aproximately 50% lower than they were this time a year ago.
    In 1980 the Iranian’s were “Bitch Slapping” Jimmy Carter, and in essence telling America to stuff it”. Today we are the acknowledged dominant power in the world. For all practible purposes unchallenged on the land, air, and sea.
    In 2009 You don’t see real national leaders doing any “bitch slapping” because they all are acutely aware of the consequences of crossing the Imperial power of the USA.(for instance a predator drone firing a Hellfire missle into your bubble bath while you are in it).
    Dig up Saddam Husssien and ask him how it worked out for him when he decided to do his oil deal with the Chinese?

  17. FredS says:

    Nothing like watching Casablanca to put you in the mood to read your latest blog entry. The economy lost 500,000 jobs last month; but not a single millionaire blow hard on that 24/7 news you have running in the background is out of work. (Including the mad money guy who said Bear Sterns was sound just weeks before going bust.)
    Time to ’round up the usual suspects’:“The Republicans do not want to spend money uselessly?” Yes, the war in Iraq is worth $1 trillion and the lives of thousand who have joined the ranks of our honored dead; it’s just not worth a single tax cut from our sacred rich.
    It is long past time for Obama to show some ruthlessness of his own. The Republicans want to stop spending, then close the federal offices in each of their districts and cancel the contracts to the companies supporting them. As for Rush Limbaugh; there was a time when the he got thrown out of the RNC (I met the man who made that happen). Hopefully that history will repeat itself.

  18. Bobo says:

    Six months or so ago the World fell off that cliff. The American Citizen did something that economists had been begging for years to occur. They started saving and the era of extravagant consumerism was dead in its tracks.
    Our government is now putting through a stimulus plan and a number of other similiar items to try to kick start our economy, I hope it works. I believe they need to start thinking more on how they are going to help the dispossessed and the soon to be disspossessed plus the other troubles that it will bring. Somehow when George Bush sent us that $600/$1,200 present it did not provide us the expected economic benefit. I believe that was a major omen and would be interested in economists thoughts on that.
    Being a realist we need to get to the bottom of this economic trough quickly so as a country we can start climbing out of it, something we do well. The continued propping up of failed institutions is just prolonging the inevitable. Let them go bankrupt as that is the process we created for this situation. None of us like the word Nationalization but that is what we need to be doing more of to help resolve this problem and once solved revert to our normal capitalism. We are living in troubled times. God help us all.

  19. Arun says:

    A more immediate concern: I watch too much 24/7 news, particularly the business channels.
    I hope that you are immune.
    Glenn Greenwald on salon.com: Due to traveling, I’ve been subjected to far more cable news over the last 24 hours than I typically endure in an entire month…..And, just as a general note: if you watch cable television news during the daytime, you can actually physically feel your brain shrinking.

  20. Babak Makkinejad says:

    The annual gloabl output is about 43 trillion dollars.
    The global savings is about 148 trillion dollars.
    The amount of securitized instruments is about 750 trillion dollars.
    You can apply a loose banking standard of 90% financing & 10 % capital and demand the volume of securitized instruments be around 380 trillion dollars.
    Thus, the total amount of un-backed financial instruments may be grossly computed to be:
    750 – 380 – 148 = 222 trillion dollars.
    This is the volume of un-backed (by the real economy) of financial instruments.
    Clearly, it will take decades to either pay that down or else write that off.
    8 trillion dollars of loss or 1 trillion dollar of stimulus is not going to make much of a difference.

  21. Totic21 says:

    Not a word here about the Federal Reserve, its sneaky eleventh hour implementation in Congress back in 1913.
    Nary a breath about the small little clique that runs the whole mess. Dont see the word Rothschild anywhere on this blog. Dont see Bilderberg, or CFR or any of the real economic DNA core we are dealing with.
    Without that background- all other info is tangential diversion.

  22. china hand says:

    Who will revive ours? I honestly don’t think they’ll bother.
    As i see things, the world is shifting away from the liberal and neo-liberal version of “capitalism” and “free trade” towards something less ideological.
    And understand: I use that term not in the virtually meaningless sense that is currently in vogue, but in the original way: to describe the set of ideas that gave us such gems as the Opium Wars and the East India Company.
    Currently, China and Russia represent the least ideological of the world’s nations. That’s a hard concept for folks from the U.S. and Europe to wrap their minds around, but the truth is that Euro-America’s economic and cultural elite have no way of describing or rationalizing their countries’ actions except with over-refined buzz-words, statistics, and hyper-intellectualized terminology that has little relationship with everyday, human activities. Humanity just isn’t buying what they’re selling, anymore.
    Since Putin, Russia has been slowly emerging from the catastrophes that brought around Perestroika and Yeltsin, and slowly but surely discovering new methods of diplomacy that — for the first time in a century — aren’t couched in ridiculous, pseudo-Marxist claptrap. The great, ancient Muscovite culture is rumbling on, and the era of Soviet-speak and ideological purity are long gone, replaced by a more naturalistic relationship to power.
    The same can be said of China. China suffered nearly a century of internecine warfare and atrocities, all brought about as a direct consequence of Western “Liberal” policy (the Opium Wars, international settlements and treaty ports, Russian and British espionage, etc — and how ironic that the most overt ideological excesses of that time were undertaken in the Latinate name of Freedom!). The Chinese — and here i mean all chinese, across the world, whether in Taiwan, Indonesia, San Francisco, London or Moscow — all remember that history quite clearly. It was simply yet another era of anarchy in that land’s long mythology, and instead of helping to re-establish peace and prosperity, the West — whether the U.S, Great Britain, France, Russia, or Germany (though also Japan) — all consistently worked instead to exacerbate and exploit it, even as that culture slowly emerged from the chaos to rebuild itself
    Neither the Russians nor the Chinese are about to let that chaos fall upon them again, any time soon. Things may get bad, but these peoples are ready to face them down with whatever means necessary, within the acceptable norms of humanity, and order.
    The United States, however, has *never* experienced an era of anarchy that comes even close to what has happened in those two countries. We are now likely to experience it for the first time, and I honestly wonder if the ideals and values I was raised with will be able to survive. I mean things like: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”, or “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed”.
    For a lot of people in the U.S. these are just words. I’m not one of those, but people like Dick Cheney and Louis Farrakhan are.
    But the greater point is this: China and Russia have a lot more experience with what’s about to happen than does the United States. It’s going to be much worse than the Great Depression, and frankly i worry that it may be quite close to the Civil War.
    Under any circumstances, it’s going to be China, Russia, and Iran — with the help of Europe, but not its unqualified leadership — who will fill in the void. The political winds are re-aligning to something closer to the 1850’s, when Europe was only an upstart partner bickering with Persia, Turkey, China and Russia. The U.S. is utterly unprepared for such an eventuality, and if it continues to be so then it will be shut out just as completely and surely as China has ben, these last fifty years.
    I think it’s time for folks in the U.S. to start considering the possibility that very soon the world may decide it doesn’t want them any more — and what the consequences of that may mean. Unfortunately, i see no-one in our leadership who is capable of such hypothesizing. Certainly not that moron Biden, nor even Ms. Hillary.
    What is needed isn’t ruthlessness, or violence. What we need now is statesmanship and nation-building. The foundations of U.S. society have been slowly eroding, now — ever since Jim Crow was enacted, and even more quickly since the spate of assassinations in the late 60’s-early 70’s.
    The U.S. is a fractured society of various peoples. We are teetering on the brink of a great fall; “E Pluribus Unum” is what’s stamped on our great seal, and the fact is that the people of the U.S. are anything but united right now.
    War isn’t going to do it. “Hope” that finances the collaborative corruption of Washington and Wall Street won’t do it; our oversized military isn’t going to do it. But someone needs to, because if the U.S. doesn’t pull itself together, the world won’t fall apart — only the U.S. will. Everyone else will turn with even greater force towards the two nations which they are currently in the process of happily re-discovering: China, and its junior partners, Russia, and Iran.
    And with that, a truly new World Order will emerge.

  23. I can report that the literary dinner was lovely. All booklovers would feel transported at eating great food in the middle of a beautifully restored 1920s library. My hosts, who have attended this event yearly since its inception, tell me that the food this year is much less luxurious. No oyster bar this time; olive bar with cheese and peppers and mushrooms on toast round instead. BUt the wine was local, the food and dessert delicious, and our gift bags were cotton canvas and included books by the authors sitting at our tables.
    In Berkeley the moneybags are ex- and current socialists. They throw their money at the library, the local co-op bakery, the Democratic party; one dowager founded the Chaplaincy for the Homeless. I felt I was eating and carousing with the right folk. The man who bought our table is going to Washington next week to parley with Krugman et al; he wants congress to raise the minimum wage as part of the stimulus.

  24. Highlander has a point, although a bit more extreme than mine. It’s bad, but more like purgatory than the abyss. We are paying for the consequences of our financial sins. This too shall pass like all the others, and not as badly as the Depression since some of the most important institutions built back then are still with us.

  25. Redhand says:

    We boomers grew up in the safety of the New Deal, which was specifically designed to prevent Depressions. We got rid of a lot of it. We were fools.
    It would not surprise me if we fell into another full blown economic Depression, in which many of us (me included) lose everything.
    The insane greed on Wall Street and in corporate America, and the craven complicity of the Congress in promoting it, are the two pillars of the problem.
    Throughout my entire adult life CEO wealth accumulation has depended not on creation of actual value but the illusion of it. Consider the S&L crisis and Milken’s junk bonds in the 1980s; the “tech bubble” in the 1990s; Enron and the string of corporate scandals at the turn of the century that spawned Sarbanes-Oxley; and now this, the greatest real estate bubble/stock Ponzi scheme of all.
    I’ll call a spade a spade. Although Democrats have in many cases been complicit, the GOP is the party responsible for the deregulation that has destroyed our economy. Thank you, Phil Gramm.
    Even now the GOP worthies in the Senate and House are utterly blind; even as our economy goes over Niagara Falls they still decry “excess spending” and defend tax cuts [for the wealthy]. Some of them are even bemoaning the cap on executive pay for bailed out banks as “un-American.”
    I’ve had it with GOP obstructionism. We need a second New Deal, and bedrock reform of the utterly rotten politico-economic system that created this catastrophe.

  26. Got A Watch says:

    I trade the markets, so my outlook is split.
    As a trader, volatility is all I need to make money and I have personally profited during this crisis.
    But as a member of wider society, my outlook is gloomy.
    As one who follows Austrian Economics, this was all so predictable, Von Mises wrote about it many years. His signature saying from 1949 covers today nicely: “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved.”
    We are mired in deflation, an economic condition that Keynesians in particular (like Krugman etc) are not equipped to deal with.
    You will get no valid solutions from Keynesians and monetarists, (includes all of Washington and Wall St), as that would require repudiation of their faith and an adoption of common sense – odds are almost nil.
    You will learn little from watching the “business channels”. They are prisoners of their own delusions and captive to advertisers, so they are only good as contrary indicators (when they yell “buy”, it’s time to sell short, etc.).
    The most probable outlook is Greater Depression II. It takes incompetent Government to take a recession and make it a Depression, and we have that factor in abundance.
    Obama’s present Porkulis Package is folly, a waste of every dime, as it does not address the underlying causes. More debt cannot solve a debt problem.
    There is no way to re-inflate the Bubble again. The greatest Credit Bubble in history has burst, and those times are over.
    You have to read Blogs to get the real accurate take on events, as we do this one for geo-politics. There are the few economics Blogs who have called every step of this crisis correctly. Mish’s Global Economic Analysis (rated #1 Economics Blog by 24/7 Wall St and Time) or Market Ticker or Naked Capitalism will all give you the unvarnished truth.
    They see pervasive deflation and economic decline for the next few years, and as a realist, I agree. Delusion is seductive, but not productive.

  27. Mongoose says:

    frank d.
    Thanks for elaborating more clearly on the point I was in fact making–however obtuse the means by which I made it.

  28. Cieran says:

    Always a pleasure to read your thoughts, but I gotta disagree with you here:
    Highlander has a point, although a bit more extreme than mine. It’s bad, but more like purgatory than the abyss.
    Highlander actually has two points, and he’s wrong on both of them.
    On his colorful “bitch-slapping” assertions, he clearly hasn’t read the newspapers lately. Pakistan just released AQ Khan, and Kyrgyzstan is busily tossing NATO out their country. Those are some of the bigger slaps of the week, and the onslaught of smaller ones (e.g., loss of another bridge on the Khyber Pass route) continues unabated.
    So much for that bitch-slap theory!
    And on the “economic purgatory vs the abyss” front, that’s nothing but orchard-variety apples versus oranges confusion. The interest rates Highlander cites were high because Paul Volcker was using his position at the Fed to break the back of a decade of inflationary pressures. Back in that day, we had to take our medicine, but at least we knew what the right medicine was.
    The problem now is deflation, and the cure for that is a lot harder to deduce, much less to take. Deflation is the kiss of death for debtors, and the US is the world’s largest of these. The unpleasant math follows directly from those two facts.
    Oil is cheap now for the same reason that Highlander’s real estate investments are locked up: deflation is here, and is making noises about staying. Not good news…

  29. John Moore says:

    Krugman is likely right. Here’s an insightful analysis by David Keene that was posted on Naked Capitalism: http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html . The analysis is rather dismal because if Keene’s model and analysis are correct, the Federal Reserve’s attempts to correct the problem will amplify it. Basically, the guys in charge are using the wrong economic assumptions about how the financial world works. They are all acolytes of neo-classical economics and follow Milton Friedman. Rather than throw away their assumptions and values and beliefs, and start over afresh, they will attempt to throw money at the problem in an economy that is credit driven. The banks create money by creating credit.
    “In fact, thanks to Milton Friedman and neoclassical economics in general, the Fed ignored the run up of debt that has caused this crisis, and every rescue engineered by the Fed simply increased the height of the precipice from which the eventual fall into Depression would occur.
    Having failed to understand the mechanism of money creation in a credit money world, and failed to understand how that mechanism goes into reverse during a financial crisis, neoclassical economics may end up doing what by accident what Marx failed to achieve by deliberate action, and bring capitalism to its knees.”

  30. Nancy K says:

    The best thing to do with 24/6 news is turn it off. We stopped cable 3 years ago and don’t miss it at all. For news I read Sic Semper Tyrannis, and some US and International Newspapers on line. I also listen to NPR. I try not to give the bad news more than 1 hour of my day, and that includes newspapers or magazines.
    In lieu of 24/7 my husband and I read, listen to music, watch movies, take yoga classes and go for long walks. The Abyss may be there but I’m not looking into it.
    That said, I don’t have my head in the sand, I believe everyone needs options and plans and I appreciate all the suggestions that have been given my everyone responding to this topic.

  31. cb says:

    I watch too much 24/7 news…After a while a cumulative impression grows that Krugman is right and that we do stand on the edge of the abyss..”
    Sure, and maybe we are on that edge. But you would also have had the impression, watching 24/7 news back in late-’02/early-’03, that we were on the verge of being destroyed by Saddam’s massive stockpile of chemical and biological weapons, with nukes right around the corner that he could loan to his close friend Osama. Cable news is good at hyperventilating.
    The language of the stimulus salesmen sounds to my ears a lot like the language of the people who sold the Iraq war: Our very way of life is threatened, and we have to undertake an enormous intervention right now, without time for debate or room for dissent.
    Life will be okay without the right to instant gratification. It might be better, in a lot of ways.

  32. cb says:

    Adding that I remember reading a list of the wealthiest area codes in the U.S., recently, and six of the top ten were in the D.C. area. With GDP falling, and federal “stimuli” soaring, we may be looking very soon at government spending that travels north of 50 percent, with all the implied social and cultural effects.
    “Collapse” of a political and economic system that pays CEOs tens of millions of dollars to run their companies into the ground; “collapse” of a political and economic system that pays thirty-year-olds seven-figure salaries to trade blips on computer screens; “collapse” of a political and economic system that promotes illiteracy and historical ignorance in a culture narcotized on passive media — I’ll take it.
    Fall back on communities and family. Grow some of your own food. Take a walk, read a book. If it comes to this, life in the Republic of Virginia could be pretty damn good, don’t you think?

  33. ISL says:

    Cold War Zoomie: We are paying for the consequences of our financial sins….
    Unfortunately, we are not paying for our sins. Those who proclaim the sanctity of the market so loudly are bilking the taxpayer to pay for their sins. If the market was the answer, well most of the US banking system is technically insolvent – i.e., most “capitalists” would be bankrupt (aka paid for their sins), and then all would be paying for their sins.
    Unless all those who made risky decisions that went south “pay for their sins” i.e., bankruptcy and pauper-hood, then IMHO the current crisis, which arose from a surplus of credit, will not end because the solution being used, inflate the deflating credit bubble, seems just plain wrong (and uninspired).
    Please note: Despite the claims on the 24/7 channels, this recession is NOT like any other (except perhaps parts of the Great Depression: The bank collapse, real estate collapse and credit collapse all happened before the recession started! Thus, I fear that the worst is only starting now, and will be severely magnified by its global nature (another Friedman gift) and a second wave of bank failures (Alt-A mortgages) and a third wave (from the loss of jobs and business bankruptcies only now starting).
    MY solution is not to nationalize the walking dead, lay them to rest, and have the govt create new institutions to replace them, with the understanding that they become market organizations at the end of the crisis. Sorry Bank of America (Countrywide will take it out soon), Citi, etc., but as you get bailed out, no one is decreasing the our credit card debts to you.

  34. Ormolov says:

    The one thing I would like to add is that we are taking measure of our future based on the FIRST of many economic bills and measures this brand new administration will put forward.
    The Republicans are still playing to their base, but many commentators expect constituent outrage to be so great that more than a few will buckle when it comes time to vote for the full bill. I hope.
    $40 billion stripped from schools by the centrists? I scream inside, then hope that an entirely separate bill in the next three months will replace that money and add some more. Right now, Obama is doing all he can with the Republicans, but we do have the luxury (unless they continue to show the unearthly discipline of zealots) of running right over those assholes and implementing what needs to be implemented over their objections.
    Yes, time is of the essence, and their obstructionism, especially after (as one poster put it) their great prophet Greenspan has already admitted the religion is a false one, is absolutely appalling. But we really couldn’t expect any more from this crew, and the only bright side is that the shrinking minority of Americans who still listen to Republicans (which unfortunately still contains a majority of our news institutions), will continue to shrink.

  35. R Whitman says:

    Stop with the doom and gloom. This is the USA, always forward looking, and not much consideration of past history. Eighteen months from now in our new prosperity we will look back and wonder what we were worried about.

  36. greg0 says:

    How much of the 24/7 hype is news that you can actually use? Sure, I went out and bought 25 pound sacks of flour and sugar during the last treasury raid by Bush. Since then, I’ve read Naomi Klein’s Shock Doctrine. If this country was dependent upon the World Bank and IMF, the pain would be a lot worse: massive unemployment, no subsidies for milk, etc, and a quicker deterioration of the middle class. Any Keynesian solution would be impossible.
    We went to a party last night. I heard sentiments like, “Daschle is a crook”, Robert Reich is a communist”, “China is a total mess”, “new technologies are a joke”, and I’m thinking the biggest problem we have is ignorance. What is going on, and why won’t the media do it’s job? The loudest blowhard gets the largest audience and the biggest paycheck?
    I hope Obama is pragmatic enough to get beyond ideologies and find some real solutions. Maybe even create a new paradigm!

  37. swio says:

    I understand your feeling that the
    I am not sure that President Obama’s stimulus package will do what is hoped. The idea seems a kind of half-assed Keynesian notion that dumping a lot of money into the economy will jump start the patient.
    Obama, and every politician, is limited in what he can do to the best available advice from economists. For some time now I have reached the conclusion that the economists themselves do not understand the real cause of our problems, and hence the solutions they offer, like massive stimulus packages, will simply not work. If conventional economic wisdom knew what it was doing, then we should never have been in this mess in the first place. 18 months ago most economists would have told you that today’s economic mess was simply impossible. Their understanding is incorrect and therefore their solutions are suspect to say the least. When I say economists, I include the likes of Paul Krugman and Nouriel Roubini here. They have been more accurate than most, but when you get down to it they don’t seem to really understand the problems here. They have great faith in the stimulus package which derives in their confidence in Keynsian economics. From where I sit, economics itself is the problem. Conventional economics is simply not up to the problem. They need new theories to deal with problems that are beyond realm of their current knowledge. Just as physics needed something beyond Newtonian physics when found problems at the start of the 20th century that could not fit in a Newtonian framework. Unfortunately I think it will take many years of failed policies for economists to accept their theories are not working and need replacement.
    I have searched for some time now for economists and non-economists who have made some progress on these new theories. I have really only found one, Steve Keen at the University of Western Sydney.
    He has found getting his ideas accepted in mainstream economics difficult and fortunately for us has decided to take his ideas directly to the public through his blog here
    It focus’s on Australia, but in many ways the Australian and US economies are very similar so the ideas translate easily.
    If you want to understand how the crisis came about then read this post
    If you want understand why economics got it wrong and why it keeps getting it wrong then read this post. It will explain how economists think and model the world and why that approach is so problematic (as compared to many other disciplines like engineering, chemistry, biology, physics, etc)

  38. graywolf says:

    You, and nearly all of your
    acolytes (readers) endorsed the Obama candidacy.
    Be careful what you wish for.

  39. Mark Logan says:

    How deep is the abyss and how close is it?
    Right now China, Japan, OPEC, and others are “married to the pot” that is America. Until
    there is another market that matches us, they may
    be forced to keep lending,
    and large unemployment will force our leaders to keep borrowing. We may re-set
    at a lower level that avoids
    utter catastrophe.
    Am I just whistling past the graveyard here…?

  40. Arun says:

    Whatever is coming down the road can’t be worse than what Great Britain faced during and after World War II, and while it lost its empire, it got through without major social upheaval.
    As best as I can find – Great Britain’s national debt was 150% of GDP in 1946; the US current national debt is something like 70% of GDP.

  41. zanzibar says:

    The only reason the abyss is noticing us is because we have repealed common sense. The actions by our economic and political elite under cover of mumbo jumbo intellectual arguments leaves me with no choice but to assume that corruption has become so entrenched that we now have a pathological kleptocracy.
    My views on the current financial crisis and policy prescriptions are well known to those who frequent SST as we have had many a discussion. My position has been that senseless government interventions will have unintended consequences and crush confidence in the fairness of our system. Our government has embarked on its third reflation this decade. The Y2K reflation led to the tech bubble and then bust. Rather than allow the excess investments to be worked off our government reflated again with loose Fed policy and fiscal stimulus (tax cuts and spending) which spawned the Mortgage Finance and Credit Derivatives bubble that has now burst. The response once again is reflation. This time our government is working on creating a bubble in Government Finance – transferring private sector losses on to the taxpayer balance sheet. Trillion dollar Treasury issuances will only beget more trillions in Treasury debt as the system will demand more and more to keep it afloat. Our policymakers want to reflate asset markets rather than reduce debt levels and increase incomes. Common sense would say that you can’t fix a problem of solvency and deep indebtedness with more debt. But when you have the same folks who created this mess in charge of the fix what can one expect? When all one knows is a hammer, every problem is a nail.
    Notice that there is very limited discussion that real wages for average Americans has stagnated for years while growth in GDP and consumption has been on the back of more and more debt for every dollar of growth. All debt based growth does is bring forward consumption. Total debt as a per cent of GDP was at 358% in 3Q2008. At the depths of the depression in 1933 with a collapsing GDP it did not exceed 300%. For comparison in the 1970s it was only 150%. Note also that there is limited discussion on how to get America back to producing things as opposed to financial engineering. Notice how small the infrastructure spending component is in the stimulus bill. Nor is there any discussion on regulatory capture in DC and ways in which we can prevent this failure to enforce existing rules that would have prevented excessive leverage and speculation with inadequate capital across large swathes of our financial institutions. And there are no calls for setting up grand juries to investigate the fraud and malfeasance on Wall Street and their co-conspirators in DC.
    We see a lot of debate on inflation vs deflation. The facts are that we have an exploding monetary base but low money velocity. Prices for oil, homes and some food items have come down but on the other hand health premiums, college tuition and some ocean freight rates have increased. Milton Friedman believed that an expanding money supply would stabilize money velocity on the other hand Irving Fischer believed that money velocity cannot increase when the private sector debt is contracting or defaulting.
    The real issue with exploding growth in Government Finance is that it crowds out the private sector which is responsible for over 80% of real GDP. My biggest concern with the first 20 days of the Obama Administration is that there has been no real debate. The policy choices are not discussed but instead we get the same worn out rhetoric, the same obfuscation, the same old folks at the helm, the same old savaging of the prudent and a sense that the new Administration and Congress are just making up the plays with not much forethought – all exactly the same as the previous Bush administation. The concern is that we will get a temporary palliative but no real reforms and our economic ship of state will remain adrift in increasingly treacherous and choppy waters.

  42. My best comment award on your Post (which is excellent) goes to B.M. His facts seem accurate. Here is another (and may be inaccurate. The 1970 US Dollar is now worth $.07. Nixon devalued and ran a non-sense war for five years only to get what he could have gotten from Hanoi in 1969-1970. Let it be stated that if Ford had pardoned Nixon after the election he would have beaten Carter. Almost did anyway. If Ross Perot had not run no Bill Clinton. Both Carter and Clinton were neither reformers or governors in the best sense of those words. Worried about the sizable Republican vote and representation. Now the Obama Administration appears to be doing the same. Can Obama either reform the government or the economy after essentially 40 years of mis-rule and ignorance. We are about to find out! Not hopeful here. And of course some big joker factors may play an interesting role. Great Britain being “Icelanded.” Mexican revolution. Death of Fidel. Breakdown in Pakistan or India or China or Russia. Well here’s to hope for a better world. One set of my grandparents had over $150,000 in depression era funds wiped out by the Post- Weimar repudiation of Reichsbonds by the NAZIs.

  43. Cieran says:

    Thanks to the links to Keen’s work. It makes for interesting reading. And about this:
    It will explain how economists think and model the world and why that approach is so problematic (as compared to many other disciplines like engineering, chemistry, biology, physics, etc)
    Nassim Taleb has been writing about this for well over a decade. His books and papers have made it clear why economists cannot predict future behaviors of economies, and he refuses to have an office if there’s an economist in the same building (even tho one could argue that he’s among the best economists on the planet).
    He predicted the LTCM debacle in 1998, and nobody listened (economists argued with him instead, even after his predictions came true). His work with Benoit Mandelbrot has consistently identified the problems that other analysts have missed, and I would highly recommend his work (his web site is the aptly-titled “fooledbyrandomness.com”).
    Taleb and Mandelbrot have recently disputed the characterization of this mess as the worst economic problem since the Great Depression. They identify it as potentially the worst economic crisis in the history of the nation, and as in 1998, few in the mainstream of economic thought are paying attention.

  44. different clue says:

    Perhaps the time to look to our own situation is now,
    while we can still do so in an orderly way without hurting anyone else in order
    to help ourself. Part of that would involve doing the
    kinds of things which are not zero-sum, no matter how many people do them. For example, if my neighbors start to garden the way I am
    gardening; they have more food without causing me to have any less food.
    Sharon Astyk’s blog mentioned above is one of several which both offer good survival-readiness advice themselves; and offer
    links to yet other blogs which offer yet more good advice. In that Sharon Astyk spirit, here are just a few others which offer information-dense advice and
    links to others which do likewise.
    Contrary Goddess (Life On The Farm):
    Free Man’s Garden:
    (This blogger also runs two companion blogs called Free Man’s Table and How Many Miles From Babylon).
    If I offered any more blogs I would run the risk of mere
    bulletin-boarding for blogs.
    All I can say is: keep following the links offered by every good blog.
    About economics: as a mere layman I have to wonder…are there any principles or theories or anything that all the economists agree with eachother on? Is economics any kind of science? Or is it merely a collection of competing ideotheologies? David Brower of the Sierra Club once said: “economics is a form of brain damage.”
    My father had a friend who was an economic analyst with the TVA, and this economic analyst said in private conversation: “economics is ultimately a branch of Moral
    Philosophy”. Does the truth
    fall somewhere between those
    two views?
    Certainly there have been
    dissident economists who are
    disatisfied with the dominant belief-systems in economics. One such was named Frederick Soddy. He was a Noble Prizewinning nuclear chemist who thought there had to be some applicable laws of matter and energetics which could explain production, consumption, and how to create a non-dishonest non lie-based method of tracking and understanding economic activity. He codified his efforts into a book called Wealth, Virtual Wealth, and Debt: the Solution of the Economic Paradox. Perhaps if we can understand what the dissident economists were trying to tell us; we can apply their knowledge in our homes and neighborhoods and protect ourselves against the kleptocratic upper class and its captive government which have, in my
    tinfoil opinion; orchestrated this crisis on purpose in order to buy up everything and everybody for a penny-on-the-dollar or less. Much as was done in Russia under the Yeltsin government.

  45. Brett J says:

    Bad? Yes. A catatrophic collapse of Civil Society? Doubtful. Americans have always been doubtful of a “free lunch” – to our benefit in a depression. “You gotta work to make a buck.”
    If this least this does is put some more of my young peers out of a service industry and into a labor industry, that would not be a tradgedy. If the most this does is force us to a stabler way of life compared to the acceleration of the past 75+ years, that would not be a tragedy.

  46. Ian says:

    we should all look to our situations.
    It’s a little early for the sauve qui peut, isn’t it? You could at least send the women and children to the lifeboats first.
    Less facetiously, anybody who isn’t part of some sizable mutually supportive group is toast sooner or later. Even a sizable stockpile of guns provides no assurance of safety if you don’t have enough people to keep watch at night.
    Leila: I trust in God.
    That’s a wise idea, even from a purely pragmatic point of view.
    When the central government gets weak or fails it’s worth asking what smaller scale organizations start looking comparatively strong.
    In in the last great depression, the solidarity and mutual support you’d find in a labour union was something workers could rely on. That’s attractive, and so unions grew and got stronger. I doubt that will happen again: too few unionized workers, and too little energy for organizing.
    The organizations that do seem ready to step into that supporting role are churches. In a tight knit church of over a thousand people, you’ve got both a wide range of skills and a willingness to sacrificially help each other. This already happens; I got my latest pair of eyeglasses at a steep discount via that kind of church network.
    I expect we will see churches gather strength over the dark years, and they are already strong. If the danger in the 1930’s was communism, the danger we are likely to face is theocracy.

  47. zanzibar says:

    To get another perspective watch this interview of Nouriel Roubini and Nassim Taleb.
    Nassim hits an extremely important point – how can we expect reform with a well thought out strategy to build a more stable economic structure when the clowns that got us in the mess are the same guys at the helm today. And what sense does it make to throw more good money to bailout these failures.
    This interview of Ray Dalio in Barrons is also a very good read. A critical point that Ray makes –
    Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring.
    What really gets my goat is that unlike Japan and Latin America, we have had a very successful experience in restructuring depository institutions in the 90s. During the Bush 41 presidency hundreds of S&Ls were seized by FDIC and assets cleared through RTC with minimal losses taken by the taxpayer. This approach cleared asset markets quickly and with minimal disruption. S&L shareholders were zero’d and bond holders took haircuts and most importantly failed managements & boards were given the pink slip. Some like Charles Keating were even prosecuted. This time a handful of insolvent Wall Street banks in cahoots with our political elite are squeezing the income starved average American and making a bad economic situation dramatically worse.
    The American economy has to be restructured away from asset inflation towards increasing real wages of working Americans producing things for world markets. This means the incentives ought to be for savings and capital investment that improve labor productivity. Not transferring private sector losses to taxpayers.
    Will President Obama and Congress stand for renewal of entrepreneurial capitalism or the crony capitalism of the recent past? Or does it require another storming of the Bastille?

  48. curious says:

    so there was a huge global bank run around september 08.
    (btw, the entire US banking system is currently insolvent. Nobody has any idea what to do really. UK is beyond insolvent, they are going to rack up huge soverign debt to clean up current mess. )
    USA was 3 hrs away from Economic, Political Collapse in September 2008
    According to Rep. Paul Kanjorski (D) (PA-11), in mid-September of 2008, the United States of America came just three hours away from the collapse of the entire economy. In a span of 2 hours, $550 billion was drawn out of money market accounts in an electronic run on the banks.
    Rep. Kanjorski: “It would have been the end of our economic system and our political system as we know it.”

  49. zanzibar says:

    Sage advise from Charlie Munger

  50. curious says:

    interesting little stat.
    there are more cars sold in china in January than in US (ie. for a month, china is the biggest car market in the world)
    yes, this is freakish time, but still an interesting little stat.

  51. curious says:

    get ready for holy cow…moment.
    Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more fanned out through Bank of America, JPMorgan Chase and other big banks across the nation.

    [E]xams for 18 or so of the biggest banks are set to begin immediately, and the first results could arrive within weeks. They are not expected to be made public for every institution.

    Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year … They are also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets … Their assumptions will be guided on a “worst case” basis.

  52. Sven Ortmann says:

    “And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years”
    Not in this world.
    The trade balance deficit is very old, exports have been smaller than imports for many, many years.
    “…are now plunging as the financial crisis hits our trading partners”
    The trade balance deficit and overall trade are plunging!

Comments are closed.