Saturday, April 04, 2009

Fabius Maximus___On Cue As Ever...

Fetters of the mind blind us so that we cannot see a solution to this crisis
Fabius Maximus | Apr 1, 2009

We know so little. This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories. In the realm of public policy that is nowhere more salient than economics. Which brings us to what might be the primary similarity between our situation today and the Great Depression.


2.That is was; what about now?
3.Afterword and for more information


Back then policy makers were bound by what economist Barry Eichengreen called “golden fetters.” For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard. That is, going off the gold standard was a necessary (not sufficient) prerequisite for recovery. They did so fearfully, not knowing what lay beyond this step into the unknown — under the force of events.

“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.” — Ben Bernanke, Essays on the Great Depression (2005)

“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy - even in the face of total catastrophe.” — Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009 ……….”E&T” refers to ”The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997

What was mysterious to them, we can see this with the clarity of hindsight. As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009: (Check link for graph, "The Great Slump Revisited")

The Earlier You Abandon Gold Standard, and Start Your New Deal, The Better...

Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.

What about now?

In 1930 mainstream economists were confident they knew what to do. Now we know that most were wrong. If this were 1930, today’s economists would know exactly what to do. But that was then; this is now. The world has changed since then. Some share the confidence of their predecessor in 1930.

{W}e know what to do and how to do it to keep the world economy out of a depression. — Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009

Our leaders have implemented the conventional remedies. Over the next 6 - 9 months we will see the results (lags are long in complex modern economies). They seek to restore the status quo ante-Depression, the post-WWII financial regime. Perhaps they will be successful.

Or — might there be an equivalent set of cognitive fetters, so that we cannot see the systemic factor that must be changed to end the downturn?

Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.

I believe there is an obvious candidate, one similar to that of the 1930 gold standard: the US dollar as the reserve currency. This is a foundational element of the post-WWII world. Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value. But that era is ending. As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegmony: monetary and militarily.

We do not want to let go that role. Nor does most of the world want us to do so. Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending. The last such transition was 1914 - 1945; nobody enjoyed it.

The clock is running on the “developed world” — Japan, Europe, and America. All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads. A new world looms ahead. We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.

Afterword — and an important note about comments to this post

This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.

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