Global Crisis Blog

Global Crisis Act Five: Everything You Always Wanted to Know But Were Afraid to Ask the Economists, in 400  Words

When I entered the exclusive Ph.D. Economists’ Guild, I had to take an exam, to see if I was skilled at mystifying, obfuscating and baffling by using incomprehensive jargon.  I passed. It took me 40 years to resign.

As part of my Economists’ Anonymous weekly regime (“My name is Shlomo. I am an economist….”), here is a brief attempt to explain what in the world is going on.

Act One.   Badly-regulated traders on Wall St. create junk assets, sell them to clients, then speculate against them by shorting them, knowing those assets (“sub-prime”) will collapse.  This act ends badly with financial crisis, beginning in 2007.

Act Two.  The financial collapse spreads around the world, creating economic crisis and recession, as financial collapses always do.  Governments react by massive credit expansion and huge budget deficits, just as the economists prescribe.  It works partly, by softening the depth of the crisis and by shortening it.  But banks fail to cooperate, choosing to hang on to the government money rather than lend it.  And …the act ends with deep worries, about Act Three…

Act Three.  Jobs crisis.   Companies worldwide engage in cost cutting, in reaction to the excessive layers of workers employed during the boom times.  They discover, wow!, they can manage with fewer workers but equal or higher output.  In the U.S. productivity growth soars, creating all the GDP growth (little GDP growth comes from added hiring).  Unemployment soars and sticks stubbornly, despite GDP growth recovery.   And, then comes Act Four, perhaps the worst of all…

Act Four. Just when you thought the play was going to have a happy end — Greece collapses, and world credit markets have a nervous breakdown.  It turns out:  By their deficit spending and massive borrowing,  sovereign governments have panicked investors, who have become allergic to risk owing to the 2007-9 crisis.  And traders, hungry for profit, do what they always do best — attack the weak,  shorting assets of governments unable to control deficits and reduce their leverage.  Europe proves inept at defending its currency by supporting its weaker members.

Act Five… Still being written.  Could be very unhappy.  If you think little Greece (population 11m.,  debt amounting to, say, $120 b.) is in trouble — wait ’til you see Britain, Spain, and Italy.  Their outstanding debt is over $1.6 trillion.

Politicians everywhere face this dilemma:  Inflict pain, slash deficits and reassure capital markets, causing renewed recession, because businesses and people still aren’t spending, while government demand is the main or only source of growth.  Or fail to do so,  and see capital flee your country and see your currency (if you have one)  and your economy crash.

The worst job in the world awaits Britain’s new Prime Minister.   People hate “doctors” who inflict pain, even when they know the medicine is vital to cure them.

That’s it.  400 words.  I wish I could write the ending.  But frankly, I have no clue.