The boom was the illusion (on the present economic crisis)

[Spider Jerusalem]

The boom was the illusion

Robert Skidelsky (emeritus professor of political economy at the University of Warwick)

Published 13 October 2011


The world economy is on the edge of a precipice. The best we can hope for now is a managed retreat from the wilder shores of globalisation. The alternative is the collapse of the euro, protectionism – and even war.

Since its collapse in the autumn of 2008, the world economy has gone through three phases: a year or more of rapid decline; a bounce back in 2009-2010, which nevertheless did not amount to a full recovery; and a second, though so far much shallower, downturn this year.

The resulting damage over the past four years has been huge. The world economy contracted by 6 per cent between 2007 and 2009, and recovered 4 per cent. It is 10 per cent poorer than it would have been, had growth continued at the rate of 2007, and the pain is not yet over. Today, we are in the first stages of a second banking crisis. It may already be too late to avoid a "double dip", but it may still be possible to avoid a triple dip. For this we need a robust intellectual analysis of what is required to ensure durable recovery, and the collective political will to implement it.

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[dkf]

1. The key is growth...

"The truth is that the policy of all-round "cutting down" increases the problem of indebtedness. The bond markets have diagnosed accurately that, in the absence of growth policies, one lot of debts after another will become "unsustainable". Both the national debt and the debts of private institutions will shrink automatically as a fraction of national income if national income grows, and conversely will grow if it shrinks. Growth, not debt reduction, should be the chief aim of economic policy today. Where there are too many debt collectors, they end up ruining themselves. The eurozone today is awful witness to this truth."

[Spider Jerusalem]

2. Which, in the face of private sector retrenchment and lack of investment...

means a robust public sector response and stimulus; priming the pump to create the conditions for recovery. Keynesian economics 101.

[dkf]

3. I wonder why they never appropriated the "growth" argument instead of "stimulus"

It would certainly turn the Republican talking points on its head.

I'm beginning to see the truth to this bit..

"The reason that economic growth makes a debt system more stable is that we are dealing with a system in which a person (or company or government) borrows money at one date, and pays back that money plus interest at a later date. If the economy is growing rapidly, incomes tend to be rising, making the payback of loans, with interest, easier. A person who has taken out a home loan, or a loan for college expenses, will find that his higher income over time makes debt payments relatively affordable. Default rates tend to be low, so interest rates can be relatively low.

If there is no real growth (that is 0% economic growth), there will still be a few situations where loans make economic sense. These projects will have a good enough return that borrowed money can be used, and the return on the project will cover the interest on the loan. In general, the process will not work very well, however. Real incomes will not be rising fast enough to provide a cushion to make interest payments more affordable. Default rates will be quite high, so lenders will need to charge a higher interest rate to cover defaults. This will make loans affordable only in fairly rare circumstances.

If we get to a situation where there is long-term economic decline, rather than growth, debt becomes a losing battle. Default rates are likely to be very high, making required interest rates (to cover expected inflation, a "rent" payment on money, and expected defaults) extremely high. Virtually no project will have a high enough expected return to be financed by debt in such an environment."

http://www.theoildrum.com/node/2983

[tama]

4. Solution is degrowth

No unlimited growth on limited planet. Peak Oil is here already. Current financial system being based on debt and interest needs to continuously grow to avoid collapsing.

It is now collapsing, has been doing so for a long time.

http://en.wikipedia.org/wiki/Degrowth

[dkf]

5. Unfortunately that leaves all debtors in a bad situation.

Or if you forgive debt them it leaves those who avoided debt without property.

[tama]

6. A question

What is more important to you? Capitalistic property or getting our shit together and satisfying basic needs of all people?

[dkf]

7. I think a collapse of the financial system leads to poverty for everyone.

They are co-dependent.

Our whole system is built on debt based on growth and that realization scares me.

[tama]

8. I was also scared

as a father of two sons, when I realized that this system "built on debt based on growth" is going to collapse during their life time. During my life time.

But from acceptance grows hope and confidence. Plants don't stop growing and feeding us, people don't stop working and loving and supporting each other. This not the end of all that we love and care about, but a new beginning.

[dkf]

9. Yeah a new beginning of being closer to the land...

Not in a happy existence of plenty for all. It will be work or starve or have individuals who will do it for you, generally your family.

Forget expecting a nice cushy job after college and safety nets galore. That will be gone.

[tama]

10. I have a friend

who does not use money. To satisfy his basic needs he needs to work on averadge of 4 hours per day - gardening, gathering, etc. Just an example of what is possible.

When we gain freedom to work for ourselves instead of the parasite class of banksters and other corporate masters, we are free to work less and more healthily.

[dkf]

12. You.-can't do that unless you have no housing expenses.

[grasswire]

14. thank you for your insights in this thread

We truly do need to think differently, and eschew the old ways. I'm trying to make that thought adjustment.

[grasswire]

13. the job after college and safety nets are already gone or going

too late, too late

[dkf]

16. I wish this is as bad as I think it could get.

It's not even close.

[bhikkhu]

11. Yes, and a big problem (in a finite world) is growth

We know that there is a limit to the size of human population (at a given level of resource consumption) that the planet can sustain. When growth takes us near that limit a number of things become different; one being that the volume of resources per person decreases.

A danger to the whole system is that resource extraction past sustainable levels can damage the natural capacities of the planet, and damage the ability of the planet to sustain such a large population in the future.

[grasswire]

15. this is why the "elites" have been privatizing and stealing resources now.

Water, gas, and more. They are Malthusians.