Friday, February 25, 2005

Instant Economic Depression

I ran into this article by Magnus Ekervik on the postponement of the intevitable economic crash. He argues that the major industrial economies should have experienced what Japan experienced in terms of an economic correction.

Because of the interconnected global economy it is my belief that the entire industrial world "should"; have entered their natural busts about the same time as Japan did. What actions did United States and Europe take to escape the beginning of the natural bust?

The answer is that they put the pedal to floor and started increasing the money supply and re-inflated their economies and postponed the bust. Nature has tried several times since 1990 to send different shocks against the world economy to start the bust.

1990 The start of Japans bust and deflation.
1994 Mexican financial crisis.
1997 Asia and Brazil crises.
1998 Debt default in Russia and LTCM failure.
2000 IT and Telecom crisis.
2002 Corporate scandals such as Enron and WorldCom.
2003 The SARS epidemic.

Despite all these shocks the world economy as a whole has continued to prosper. How?

The US Federal Reserve Bank has met every shock with an increase in the money supply to bail out the affected country or institution to avoid a bust of the world economy. The result is that the excess debt of the boom has never been corrected. On the contrary the money supply has kept increasing and total debt has mounted as a result.

Ah, the debt problem. Economist Michael Hudson has outlined the Modus Operandi of the Social Security privateers in the US, who have used this debt bubble as a means to privatize SS.

Lower interest rates mean slower accruals of interest in the government's own Social Security and medical care funds. Low interest rates show how futile it is to try and pay for the future by buying bonds or stocks, or otherwise saving money without somebody, somewhere, actually investing to produce the goods and services that people they are going to buy when they retire. Saving, stock and bond speculation and real estate speculation do not by themselves lead to new investment. In fact, the higher speculative and financial returns are, the less incentive there is to actually tie down money in building new factories and expanding business.

Magnus basically argues that, given a terrorist hit on US soil, the entire deck of cards would fall, and the global financial architecture would cease to exist. What sort of Phoenix will emerge from the ashes? Hazel Henderson is said to utter something to the tune of: Collapse is the easiest form of change. Interesting.