Subjective Invective v.6

The Lesser Depression

When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.
Everything might still have been O.K. if other major economic players had stepped up their spending
...
In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.
Nor did governments do much to help.

Except for the massive coordinated monetary policies of all central banks, including about 16 trillion in programs from the Federal Reserve alone. Followed by the massive fiscal stimulus by the US and one by China. Followed by two rounds and 2 trillion more in QE by the Federal Reserve.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.

Take a look at the historic lows Greek debt enjoyed until, within a short span, it was game over. The problem is no one can predict when the market will turn against a debtor nation with a structural trade deficit. The US might have low rates for the next 10 years, or it might have a bond market meltdown next year.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

When banks create too much credit, to the point of debt saturation, the inevitable bust is going to be painful and no amount of trickery can fix it. The answer is not more debt, it is the elimination of debt through payment and default. If you don't allow the debt to deflate, organic growth can't return. More fiscal stimulus won't jump start the economy. Another big world war can eliminate a lot of the work force and create the missing demand you seek, but that is an ugly solution. Kill the debts, not the people.