November 13, 2010, 9:33 am
Axis Of Deflation
I’ve lately taken to reading another econoblog, TripleCrisis; it’s been especially good on the (especially bad) G20 summit.
In particular, Gerald Epstein is right:
A strange thing happened on the way to the G-20 meetings: world elite opinion has turned against the Federal Reserve’s “quantitative easing” (QE) program, the only significant “Keynesian” macroeconomic policy being implemented anywhere in the face of massive unemployment in much of the developed world; and this criticism is garnering some support from strange places, including among some progressive economists. With all the hub-bub, the mercantilist policies of Germany and China and the pre-Keynesian Gold Standard-like stance of the European Central Bank (ECB), are getting a virtual free ride. Meanwhile, the true villain is escaping scrutiny all together: the elite consensus that there is too much sovereign debt in the world and so there cannot be any more fiscal expansion.
The basic situation in today’s world isn’t mysterious: we’re in the midst of a deleveraging crisis, in which those who ran up large debts during the Great Moderation are being forced to pay them down, rapidly. The trouble with this situation is that someone has to make up for the decline in debtors’ spending, or the world will be pushed into a deflationary slump. Fiscal expansion could do the job – and no, it’s not absurd to say that the solution to a problem caused by some actors taking on too much debt involves having other actors take on debt. Monetary policy can also help; but conventional monetary policy is at its limit, so expansion has to take unconventional forms.
But almost the whole world has turned against doing anything that might actually help. Fiscal policy has been killed by the Pain Caucus; and now they’re coming for monetary policy. China’s predatory policies are hurting everyone else — but somehow Ben Bernanke has become global enemy #1.
It’s not as if the job of recovery is done. True, Europeans are acting as if they’re fully recovered — but the truth is that eurozone industrial production is still below its 2005 level (pdf), and seems to be stalling. Worldwide, we probably have an output gap — resources going to waste, because we’re not using the productive capacity we have — of at least $2 trillion at an annual rate.
The sad thing is that this is entirely gratuitous. With clear thinking and a little political courage, we could have ended the slump by now. Instead, however, it seems likely that the whole advanced world — not just the United States — is headed for years and years of stagnation and mass unemployment.