Interesting Comments



Here’s a comment from a recent post on CalculatedRisk that I found pretty interesting…
http://calculatedrisk.blogspot.com/2008/03/delong-sounds-alarm.html

Ralph Cramdown writes:
Well, I started this thread; I might as well end it.

One danger is people who say “what’s wrong with a little deflation, or a little more inflation?” The problem is, a little turns into a lot. They tend to be self-reinforcing. At least US debt is denominated in dollars, which Argentina and Mexico didn’t have going for them. What would a depression do? Well, maybe people who are five years old today will have basements full of glass jars and metal and sundry items too good to throw out 80 years from now, just in case. That’s what the last one did.

Two things which have supported the US economy of late were consumer spending and net capital inflows. But every time foreigners from places with cash flow have tried to buy equity stakes, they’ve been rebuffed on grounds of national security. And if they get a whiff of depreciation, they’re not going to want the bonds, either. Consumer spending has been done to death, so I won’t address it.

There is a danger that current conditions could provide opportunity for the last gasp of the neocons, them of the “We hope to get the federal government small enough so we can strangle it in the bathtub” ilk. At this juncture, this counter-Keynesian, cycle-reinforcing move would have similar effects as the decision to dismiss the entire Iraqi army: Large bands of well armed unemployed roaming the country looking for a way to feed themselves and their families.

The difference between Japan’s ten lost years and a possible similar period in America is that the Japanese citizens were poorly armed, but diligent savers with money in the bank.

Some think that this comeuppance could see America “go back to being the global leaders in innovation and technology.” I don’t think so. Having gone from a pioneer in public education for all, through Uncle Milty Friedman’s disavowal of the utility of public schools to current times, where congressmen and the rich send children to private schools, the affluent live in areas with good public schools, and everyone else gets the schools which don’t instill basic literacy, never mind critical thinking or a knowledge of history. Universities, likewise, in the post-9/11 crackdown, have ceased being the magnet for the brightest from around the world.

The manufacturing got offshored and replaced by the rise of the service economy: Accountants, lawyers and investment bankers to be sure, but also telephone sanitizers, manicurists and baristas. I think some of these services represent the gap between the previously believed lower bound on non-inflationary unemployment and the levels seen since — in an affluent society living beyond its means, there’s a lot of room for pamperers and personal servants; unskilled labor which will become surplus very quickly as discretionary spending shrinks.

I don’t see easy credit solving a lot, because it presupposes that there’s entrepreneurs with good credit, skilled labor and markets which, for want of investment capital, aren’t being brought together. I don’t see that as the current situation, but maybe I’m wrong.

If one in fifty homes goes FC, but in varying geographic concentration, what happens to the places where it’s 1:20 or 1:10? Is America really prepared to write off Cleveland, Detroit and other cities as it wrote off New Orleans? Will entire states go by the boards?

A lot of the problems I’ve highlighted aren’t the sort that get fixed in one credit cycle or one election cycle, they’re the sort that take a generation. I don’t see the type of leadership, the visionaries, or the dollar-a-year men who are even grasping the scope of the problem. Public service sure isn’t attracting great talent, at the municipal, state or federal level.

I have no idea how bad things are going to get. I’m pretty sure it isn’t going to be a short, sharp recession. Maybe things will start improving by sometime in 2009, maybe they’ll just keep going East for a few years before the turnaround, and maybe things will get really bad, and this is the end of the whole Pax Americana thing. One thing’s for sure. I didn’t even address international implications but, outside of the money centers, there are very few people in the world right now wishing America a speedy recovery, and quite a few states who will use any opportunity to increase their spheres of influence.
Ralph Cramdown | 03.23.08 - 12:50 am |

March 23, 2008 | Filed Under Economics & Finance 

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