But What About the Real Economy?
But if we get a true dollar crisis, that calculus no longer obtains. If the United States faces a situation at some point in the near future where we cannot finance our debts from abroad in our own currency, we would be forced into the kinds of austerity measures that created deep depressions in multiple emerging markets in the 1990s. To the extent that our current actions are retrospectively blamed for contributing to that crisis, we’ll regret them even more than we regret allowing the housing bubble to develop in the first place.
The calculus he refers to is the potential that the Bernake/Paulson/Geithner/Obama bank bailout plans works, some inflation perhaps takes place on the far side of this crisis (which has stopped the deflationary bank cycle). That inflation can be held in check–not without likely some problems but manageable–and then some policies are enacted that Millman thinks would support overall growth and be wise (e.g. trading in the payroll tax for a value-added tax).
The alternate Noah lays out is what as he says a true dollar crisis. This could happen. A lucid explanation of the exact why such a crisis could go here.
Now Noah knows more about this stuff than I do, but I thought another (more likely?) danger was the following (from Bernard Lietaer):
The next logical phase in this systemic crisis is now unfolding on automatic pilot. Whatever governments do, the banks and other financial institutions will want to cut back drastically on their loans portfolios wherever possible, in order to rebuild their balance sheets after huge losses. This in turn will weaken the world economy to the point of a recession, which will spiral into a possible depression because of the lack of credit being made available to business. Thus, while cutting back on its loan portfolio is a logical reaction for each individual bank, when they all do – simultaneously, it deepens the hole for the world economy and ultimately for the financial system itself.
–(from white paper on systematic banking crisis available from his website)
And again (p.9):
Secondly, even if both strategies –bailing out the banks and re-regulation of the financial sector – are implemented reasonably well, neither resolves the “Second Wave” problem: The banking system will get caught in a vicious circle of credit contraction that invariably accompanies the massive de-leveraging that will be needed. Depending on how the re-regulation is implemented, it may actually inhibit banks from providing the finances needed for a reasonably fast recovery of the real economy. In any case, given the size of the losses to be recovered, it will take many years, in the order of a decade, certainly more than enough time to bring the real economy into real trouble.
So more than nice reports that shipping orders are up (h/t Sullivan) is Lietaer basically right? That is, is the next round of the debt deflation could be in the (for lack of a better term) real economy which will not get a bailout since all the money’s been spent on the banks who have–given the frame of their business–used that money to cover themselves during their period of deleveraging.
The other alternative I suppose is that the banks are not hoarding the money and are lending it out–would that be setting the ground for another bubble? Which is I guess Noah’s dollar crisis hyperinflationary all bets are off scenario?
In sum, the analysis in these circles still seems too bank-focused. Again this is about out of my normal zone, so perhaps I’m missing something totally obvious.
For those interested, Lietaer is one of the chief architects of the Euro. His larger argument–along the lines I’ve mentioned before in terms of a Commons (see here and here for example)–is that banks should not hold the monopoly on wealth (er debt) creation. Banks should be, as Nicholas Nasim Taleb has argued, basically public utility companies or service industry providers. Capital (via trust) creation should come through The Commons. For an example of a business to business credit system (routing around banks), see the WIR example from Switzerland. Applying ideas from ecology and system theory, Lietaer argues in the white paper linked above that to create a proper “ecology of finance/money” requires diversity and redundancy (resilience) as well as efficiency with nature selecting for a decent balance between the two–though shifted more towards diversity-flexibility than efficiency. The current system whether via left-wing arguments for regulation or right-wing arguments for deregulation are both still predicated on the centrality of efficiency.