Monday, August 8, 2011

Double Dip Or Fallout

It is sad that this has to happen but it has been obvious for a long time - that the structural break of the US economy is now firmly evidenced by the inability of monetary expansion to paper over. We should now expect deflation in the US as it has been in Japan since the early 1990s.

We cannot be thinking about marginal adjustments in the global economy. It is not as if the US economy is still structurally sound and that a sharp depreciation of the US dollar will correct its external imbalance which it doesn't have much relatively. With the rise of China (and India), the US (and Japan) collapses. Germany may hold, but the Euro may break.

The rise of China not only took away manufacturing jobs from the world, but competes with the rest of the world for food and resources. That a billion of Chinese now chooses not to go hungry means food production must rise by 1/6th or a billion people outside China must starve.

Central banks must reduce monetary expansion and direct the new expansion towards food production and away from real estate, stock purchases and credit cards.

Deflation is a needed adjustment after the sustained monetary expansion. This could put more people into productive work to increase output (especially food). This alternative has been viewed negatively as a rise in unemployment which is true in technically unprepared societies.


walla said...

Too much urbanization has taken place for people to return to the earth and live hardier lives especially if they are neither trained to farm nor inclined to sell their urban assets at a loss.

There are also structural problems in land alienation, irrigation, distribution and inclement weather; unless the farming projects are big, all not exactly providing good business case to banks.

See for yourself how the farmer in China has to await the return of both swallows as signal to start replanting. Bad weather slows their return. Which means the crops will be harvested only later:

The advanced countries should have seen it coming that once the BRIC economies emerge, they will want to do what the former have been doing in past centuries - develop their industries and provide for their societies - despite coming out the worse off from signing WTO agreements partial to the west.

Now these western economies are just solving the impasse by ignoring it in much the same way their rating agencies have conveniently overlooked their own roles in the mortgage crisis.

West-run governments and media are quick to solicit revaluation of currencies in emerging economies but if they do so, the ensuing inflation will destabilize those emerging societies and if they don't, the situation will aggravate to a climax when the dollar will be worthless upon encashing the next treasury certificate.

The only way to stop the runaway train is to replace the US dollar with another default trade currency.

Or cede the states of California, Alaska and Hawaii to China; those states may end up better run.

Anonymous said...

Hi Theorist,

Pls listen to this speech by Prof Steve Keen about his takes on the neo-classical economy.

Also on Prof Ann Pettifor's.!

Like to get a some feedback from u.

etheorist said...

I listened to the video for 15 mins and skimmed through sections of the remaining. My comments:

1. Steve is saying that neoclassical theory is not a theory but a philosophy which I agree. But that he appears to advocate the classical theory especially to reversion to the Walras type dynamic systems thinking shows that he probably has no clue as to the theoretical basis of current economic ills except for debt to rise faster than GDP.

2. I didn't hear much of Ann except that there are all these things that are wrong in the way economists are lookig at the current world economy.

Other comments:

3. I have spent my post-grad years avoiding this academic crowd and am glad that I have managed to dip my toes into the economic reality and gain some insights into it, some of which I try to share in this blog.

4. The world economy is in a mess because it is trying to search for certainty in a standard for value, the absence of which is resulting in the creation of man-made assets.

5. I could be less frequent on this blog (short of closing it down altogether) because I have said what I wanted to say of where the world economy is heading and I am sorry that it is where it is today.

6. I have been very busy and away from office as well.