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[WARNING: THE FOLLOWING IS A VERY PESSIMISTIC GLOBAL POLITICAL ECONOMY POST]
So, just to sum up the past week or so of global political economy events:
1) U.S. government debt got downgraded by Standard & Poor;
2) Global equity markets are freaking out;
3) The eurozone appears to be unable to solve its sovereign debt problem
4) London Britain is burning;
5) The Chinese are pissed that they appear to be underwriting downgraded, debt-ridden train-wrecks... and this is on top of being pissed about their own train wrecks.
This all sounds very 2008, except that it's actually worse for several reasons. First, the governments that bailed out the financial sector are now themselves the object of financial panic and political resentment. Second, the tools used to try and rescue the global economy in 2008 are partially to blame for what's happening right now. Despite all the gnashing of teeth about the Fed twiddling its thumbs, it's far from clear that a QE3 would actually stimulate anything besides a rise in commodity prices.
With both Europe and the United States unable to stimulate their economies, and China seemingly paralyzed into indecision, it's worth asking if we are about to experience a Creditanstalt moment.
The start of the Great Depression is commonly assumed to be the October 1929 stock market crash in the United States. It didn't really become the Great Depression, however, unti 1931, when Austria's Creditanstalt bank desperately needed injections of capital. Essentially, neither France nor England were willing to help unless Germany honored its reparations payments, and the United States refused to help unless France and the UK repaid its World War I debts. Neither of these demands was terribly reasonable, and the result was a wave of bank failures that spread across Europe and the United States.
The particulars of the current sovereign debt crisis are somewhat different from Creditanstalt, and yet it's fascinating how smart people keep referring back to that ignoble moment. The big commonality is that while governments might recognize the virtues of a coordinated response to big crises, they are sufficiently constrained by domestic discontent to not do all that much.
So... is this 1931 all over again?
There are three aspects of the current situation that make me fret about this. The first is the sense that developed country governments have already tapped out all of their politically feasible methods of stimulating their economies. This is the time when both politicians and voters start to ask themselves, "Why not pursue the crazy idea?"
The second is whether the Chinese government will do something to satiate their nationalist constituency. Neither Joe Nye nor James Joyner thinks this is likely, and I tend to agree that any effort at economic coercion will hurt China as much as the United States. When autocrats are up against the wall, however, then they might take risks they otherwise would never consider.
The third is this working paper on what causes societal unrest in developed economies (h/t Henry Farrell). The abstract suggests more trouble on the way:
From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble crosscountry evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor.
So... there are, unfortunately, numerous reasons to think that we're headed down a bad road... which is the pretty much point of this post.
Readers are encouraged in the comments to offer counterarguments for why things aren't as bad as 1931. I'll be offering some thoughts about why 1931 won't happen again later in the week.
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DICEYLEE
9:23 AM ET
August 11, 2011
Could this possibly be worse than 1931?
Jared Diamond in "Collapse" argues the case that serious fiscal problems brought on by corporate (business) malfeasance that harms the public, are ultimately the public's own creation (hence the sub-title 'How societies choose to fail or succeed').
Currently the American public remains blinded by the Dem/ GOP divide-&-conquer strategy. The debate on our financial problems center around the notion that we should capsize our own society. Talks of recovery through any means other than austerity often end with infighting between people that want to drive the Gov of a cliff & those that don't.
Assuming Diamond's theory is correct - What hope of recovery do we have when state of the public is as such? Even if we convince the GOP to stop trying to self-destruct, we'd still be stuck with all the dead weight & a huge hill to climb (And that's the best case scenario)...
How f---'d are we??
[Twitter: @DiceyLee808 ]
ARVAY
10:43 AM ET
August 11, 2011
where we're headed
It's often said that people, especially the young, learn by example. The US touts itself as a nation under 'the rule of law,'
Let's see - - -
Powerful interests arrange for deregulation of vital parts of the economy, and then cause it to blow up -- triggered by writing mortgages for the fees rather than than to generate reliable loan income. These are packaged into toxic securities that are rated AAA by the leading rating agencies. The government allows all of this to happen even though it's charged with protecting the nation's interests.
Nobody is prosecuted, at least not so far. The laws are written to legalize much of this fraud and deception, and only wrist-slaps are delivered.
The instigators are bailed out, made whole and are prospering, while the middle class is ground down , and will be asked to pay up for the austerity measures that will be necessary. Banks are tying to foreclose based on absent or faked documentation. (Why aren't they arrested for faking the mortgages? I'm sure the law has been adjusted so this isn't criminal) Stay tuned.
Fake financial reforms have set us up for another big collapse.
Now, a minority has refused to compromise and has created still-unfolding damage. Reasonableness is obviously not the way to get what you want.
The logical lessons:
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