Economist and NY Times' op-ed writer Paul Krugman sees the beginning of "the Third Depression" in America and around the world. Pointing to the Long Depression of the 19th century (beginning in 1873) and the Great Depression of the 20th century (1929), Krugman argues that what we saw both times was "an era of nonstop decline." This is what we face today.
Arguing that the Third Depression is really just getting under way, Krugman writes that "this third depression will be primarily a failure of policy" and points to "last weekend’s deeply discouraging G-20 meeting" where governments obsessed about inflation "when the real threat is deflation." For Krugman "preaching the need for belt-tightening when the real problem is inadequate spending" is a policy prescription destined for disaster because of the millions who remain unemployed.
The primary culprit here is "the victory of an orthodoxy that has little to do with rational analysis," with policymakers slavishly adhering to the idea that we need to assuage markets by holding back on spending. The outcome is a stunningly shallow belief globally "that imposing suffering on other people is how you show leadership in tough times."
When we throw in the fact that Republicans derailed legislation last week that would have extended unemployment benefits and sent billions to states in an effort to avoid layoffs it's easy to understand Krugman's pessimism. Over 1 million people will be affect by this decision. To be sure, apart from being unhinged ideologues who say one thing and do another, the Republican party's real goal is to keep the market collapse going so they can pin it on President Obama in November (so much for "America First"). Still, in the final analysis what we have is a leadership - both national and global - who cling to the tenets of a dying ideology like the monarchs of Europe clinged a decadent and dying feudal system.
Apart from the fact that Krugman has gotten so many things right over the years, I'm inclinded to agree with Krugman's assessment because of the evolving characteristics of our economic situation. The biggest issue for me is how we continue to believe that if we appease the same corrupt market gods who got us into this mess that they'll act good and respond with appropriate investment strategies, just like the textbook says it should happen. This expectation is simply naive.
From the tricks behind high frequency trading, to the astronomical bets made in derivative markets few understand, to the lack of transparency surrounding toxic assets, to the use of unicorn math (mark-to-market accounting) and a genuine depence on government favors (both bailouts and legislation), we are witnessing the wholesale destruction of market capitalism around the world. The focus is no longer on wealth creation, but wealth extraction. Adam Smith is turning in his grave.
That policymakers believe fiscal authority, without serious real financial reform, will save the day in this environment says much about our failure to learn the lessons of history. A third depression, indeed.