David Levy says that the only way to manage the current deflationary crisis in the private sector is to increase deficit spending on the government level.
(Video follows excerpts and commentary)
The dominant influences on deficits here, in Europe and in Japan, are the problems in the economy. Balance sheets got too big in the private sector, debt became too high to be serviced and asset values rose too far to justify. Debt was way to high to be serviced…
We’re going through a period of enormous weakness in business investment, household investment…
…What we should do is much more long-term federal investment – infrastructure, education, military hardware, whatever we can think of.
Mr. Levy is certainly correct about the collapse in private sector balance sheets, over-leveraged and unserviceable debt, and weak household investments. The private sector is collapsing because asset values got way to high and formed a bubble. Now that bubble is bursting.
But where did those overvalued assets come from in the first place. Speculation is one reason, and in a free market that happens sometimes. But one of the main reasons is cheap money from, you guessed it, government and Fed policies. When money is given away for free with near zero interest rates, what does Mr. Levy think the end result is going to be? More money chasing fewer goods leads to price inflation, which is what we experienced in the period between 2002 and 2007 in real estate and other assets. Now, that manufactured demand is collapsing, as it should.
How, exactly, is increasing deficit spending in areas like infrastructure, education and the military industrial complex going to create any sort of growth in our economy? Building a bridge, increasing the salary of a teacher or spending millions on a new fighter jet is not going to increase sustainable productive capacity in the United States for the long-term. You can spend trillions until you’re blue in the face, but if you are not creating long-term production and employment that the rest of the world needs, then you might as well flush that money down the toilet.
No, Mr. Levy, we should not just spending billions and trillions of dollars on “whatever we can think of.”
We’re in a period we call a contained depression.
…
It is very clear that the problem is that private balance sheets are contracting. Private debt is contracting so rapidly that even with the huge increase in government debt, the total debt in our economy is shrinking. If the government wasn’t out there doing that we would have an even faster collapse and a disaster.
…
Indeed, it is a far far better consequence to have a very large deficit run up for even a decade if it takes that, then to have the kind of collapse like the Great Depression.
Hopefully, this “contained depression”, as Mr. Levy calls it, is better contained than the sub-prime crisis, which Mr. Bernanke said would not spread to the rest of the economy and financial markets. We know how that containment went. (Hint: kind of like BP’s first, second, third and fourth attempts at plugging the oil gusher.)
Private debt is contracting for a reason : Because the market (general population) has finally caught on and realized that we have bitten off more than we can chew. The pendulum swung to the upside for decades, with asset values exploding. Now the pendulum is swinging to the other end. This is a natural consequence of overspending, taking on too much debt and not being able to service that debt.
While Mr. Levy is right that we would likely have had a rapid, multi-year collapse had the government not injected trillions of dollar in spending on whatever they could think of, we believe that current spending could lead to something much worse than the Great Depression.
If you were to count all of the deficit spending, debt and future obligations (social security, medicaid, Obamacare, etc.) our debt is somewhere north of $100 Trillion. Deficit spending only works until is doesn’t. The Keynesian approach to managing this crisis is to continue to spend other peoples’ money. What happens when we run out of other peoples’ money? What happens when other people no longer want to lend money to the United States at any interest rate?
We’d say that the end result of Mr. Levy’s strategy of whatever-you-can-think-of-spending is that the box in which the depression is currently contained will blow open something like this:
Watch David Levy on Yahoo Tech Ticker:
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Depression is contained………hyperinflation assured.  Â
You can thank the Keynesian from Kenya who resides in the Oval Office.Â
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 75.5, the highest since January 2008, from 73.6 in May. The gauge was projected to rise to 74.5, according to the median forecast in a Bloomberg News survey of 65 economists.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHpi59pb3V60&pos=1
excuse me, there is no american banking system. there is primarily a group of six banks that churn paper to generate income for the insiders with their high frequeny schemes which now comprises 70% of all wall street transactions. there is no hope for any degree of recovery until this is completely stopped by tough regulations and productivity within america increases greatly by stopping outsourcing…
Our “leaders” took the old bumper sticker “We can’t be broke, we still have checks left” to heart. In my household and everyone else that has a brain, when you have less revenue coming in, you cut spending. Not with our illustrious federal government though.
I posted this early today commenting on the ‘Economic Uncertainties are Multiplying’, but it applies here, too..
Yesterday I heard a comment from a spokeswoman from the Retailer’s Association. She said retail sales were down 1.2% because “with the contraction of credit that people can no longer spend beyond their means and that is what fuels our economyâ€. That pretty much explains the whole mess we are currently experiencing……it is all one big phony bubble. All due respect to George Will, but there is plenty of blame to go around on both sides of the isle. Has the Obama administration made it worse; absolutely, but W was asleep at the wheel for eight years except when it came to making his buddies in the oil and military industrial complex more rich. I do agree with Patriot one in that the collapse could come any week or month. I do not think there are enough presses to monetize us out of this mess.
One more thing….the time to stop spending is right now! If we had a President with stones and JFK or Eisenhower was the last President with those. The President would go in front of the camera and tell us that we are in a pile and we need to suck it up! Nobody wants to hear that, because 60-70% of Americans are in over their heads and will stop spending money they don’t have (anyway), the minute they hear the bad news….then the collapse will REALLY come. The Government is living the same lie that people do.
If they decide to spend money on “anything they can think of”, then think of me! Give me…oh…say….50 million bucks and I guarantee them boys in DC that I’ll stimulate the economy! I’ll stimulate Glock, Colt, HK, Remington, Zeiss, Mountain house, Gander Mountain, Misc. building contractors, escavation companies, PM dealers……and a lot more! 🙂
The long term solution is to re-invent technology, bring back jobs, and boost production.
This outsource thing was one of the worst actions that U.S. industries took.
People lost their jobs, production stoped, knowledge was lost, the state supported millions of unemployed, and finally crappy imported goods (American in brand) had to be sold to low income citizens.
This leads nowhere. It’s a downward spiral with a predictable end.
It’s not necessary to graduate from Columbia to undestand it.
@ Jack C
Bingo.
Additionally, it’s the kind of thinking Mac refers to in this bit, combined with the fact that these are the morons that D.C. will listen to, that has me to convinced that…
This is going to end very, very badly.
None of this was done by accident, all of it had a very specific purpose. The elites know that the only was to ever achieve their goal of a New Global One-World Financial Order was that they first had do destroy the United States of America as a global financial power. After all, who is left to object besides the United States??? Once we are finally gone there will be none left to oppose the elites. And if along the way, the Corporate Kleptocrats were able to realize a few trillion extra $ by oursourcing USÂ jobs overseas ……….. well then so much the better.
It’s just about all over and done with, that is ……… all except for the crying part boys & girls. But not to worry, it’s just about time for American Idol to come on the ‘twonky’. Times will certainly get much better tomorrow. Our beloved president Mr. Barkie Obungle tells me so.
Right,they’ve “contained the depression”.
I guess the Germans in 1923 contained theirs as well by printing lots of paper.
How wonderful it would be if that’s all that it took,to just print your way out of problems.
Got gold?
Well the frightening thing is that when the greatest depression comes it will hell. Only 2% of Americans are agrarian and can grow their own food. 98% of us live in cities and suburbs and when the shtf the good ole govt will be overwhelmed  and there will be chaos and rule of the gun. read this article of what is going on in Kyrgyzstan. this is what is coming to our nation to evry city with populations over 100,000. But it will 100 times worse.  http://www.rferl.org/content/Kyrgyzstan_Sends_In_More_Troops_As_Death_Toll_Rises/2070173.html
Mac,
Here comes round two. Obama, Bernanke, Summers, and Gibbs are such lying assholes.
http://www.businessinsider.com/its-official-fed-governors-are-starting-to-worry-about-a-double-dip-2010-6
Paul Revere
They are all lying assholes; it has nothing to do with who is in the White House!