Last month Nobel Prize winning economist Paul Krugman of the NY Times put forth a dire warning that we are in the beginnings of a third depression. There have been two already in US history, the Long Depression that followed the Panic of 1873 and the Great Depression of the early 20th Century.
“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,” Krugman writes.
Most agree it was a failure of economic policy that brought us to this point. However, the proposed solutions differ greatly among various economists and business leaders. Krugman’s Keynesian approach would be to increase stimulus spending, but critics argue that this approach has been ineffective so far and warn against the consequences of driving deficits to even more precarious heights than where they now stand.
“In the last two years, we’ve had gargantuan spending and ultra-easy money,” says CNBC host Larry Kudlow in an interview with CEO Steve Forbes of Forbes magazine, “which is what Professor Krugman has been advocating the whole time. And he still thinks we’re in a depression. So I need to ask you, maybe his policies are what threaten the depression.”
“Well, it’s like the old physicians who continue to bleed the patient and wonder why the patient isn’t getting better and then bleeds the patient even more,” Forbes responds. “What we should be doing, yes, we should be cutting back spending because it takes money from productive citizens.”
Fiscal conservationists (a.k.a. “deficit hawks” to those who side with Krugman on this issue) maintain the US national debt is already at a tipping point and taking on further debt would threaten to push the country itself into bankruptcy. They also point out that the consumer is tapped out between personal debt, diminished credit and unemployment, and simply cannot afford to pay higher taxes or subsidize further bailout programs.
Liberal economist and co-director of the Center for Economic and Policy Research in Washington D.C., Dean Baker, sides with Krugman. He likens the stimulus effort to trying to put out a forest fire with only a few buckets of water. He explains it’s not working because we need more water.
“I mean we lost over a trillion dollars a year in annual demand. We tried to replace it with the stimulus that it came to from the federal sector about $300 billion a year, you subtract out the cuts at the state and local level, that’s $150 billion a year. Where I come from $150 billion isn’t going to make up a loss of a trillion. That’s simple arithmetic.”
As the debate rages on about how to deal with the fiscal crisis in which we find ourselves, more and more economists seem to agree that difficult times lie ahead. We may even be heading into a real depression. In a recent interview with Charlie Rose, NYU economist Nouriel Roubini warned of a looming global crisis. He now says a double dip in the recession has already arrived.
“Fasten your seat belts for a very bumpy ride.” At best, Roubini says, “we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment.”
On the extreme end, market forecaster and social theorist Robert Prechter of Eliott Wave International is convinced we are headed for a crisis worse than any we’ve seen yet, with the possibility of the Dow falling below 1000. His analysis is based on principles developed by Ralph Nelson Elliott in the 1930’s, which assert that financial markets move according to complex but predictable fractal patterns based on cycles of social mood among investors.
“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter forecasts. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
At the close of the G20 conference in Toronto last month US policy makers seemed to be turning away from the idea of employing further stimulus at this time and toward adopting a plan of greater fiscal austerity and balanced-budget orthodoxy, as the Euro zone has done with verve as of late. Hence, Krugman’s lament.
“And who will pay the price for this triumph of orthodoxy?” he asks. The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.”
Wherever we may go from here, the fact is we are already experiencing unemployment at depression levels according to the U6 measurement, which accounts for those who are underemployed and those who have given up looking for work out of despair, as well as those who are unemployed and receiving benefits. And there is no visible source of job creation on the horizon. What lies ahead instead is a further rise in unemployment, larger budget deficits, continuing decline in home prices, larger losses for banks, shrinking access to credit and possible protectionist measures that will dampen growth. Depression is upon us.
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