"On the Edge" Paul Krugman

"...Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners."  Paul Krugman

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"Do not stare too long into the abyss lest the abyss take notice of you..."  I "improved" that a little, but...

The abyss seems to have noticed us.  I watch too much 24/7 news, particularly the business channels.  I have it running in the background while I work.  After a while a cumulative impression grows that Krugman is right and that we do stand on the edge of the abyss looking down into eternity.  Rothko painted the feeling in that scene.  Actually, he painted it over and over again until it killed him.

A total collapse is a possibility, a collapse of everything; the economy, the social order, government authority.  How high does unemployment have to rise in a country full of people raised to believe in their "right" to instant gratification before the restraints that protect the "rights" of wallstreeters to their undeserved bonuses seem trivial things?

The Republicans do not want to spend money uselessly?  They may wish soon that the money they saved would buy something, anything.  I lived in occupied Germany as a child.  Our father was one of the occupiers.  I remember the Germans when they had wheelbarrows full of Reichsmarks.  Only the intervention of the victors revived their fortunes.  Who will revive ours?

I am not sure that President Obama's stimulus package will do what is hoped.  The idea seems a kind of half-assed Keynesian notion that dumping a lot of money into the economy will jump start the patient.  The image of Barack Obama with the paddles in his hands is distracting.  I surely do hope that will work.  If it does not, then we should all look to our situations.  pl

http://www.nytimes.com/2009/02/06/opinion/06krugman.html?em

Comments

[Jose]

"he who stands greatest, stands alone." - can't remember the source or find it in the google

Since American has stood as the greatest country in the world: maintaining an Empire, unilateralism, massive tax cuts, sending millions of jobs overseas, defending countries that are not in our interest, reforming Islam, bringing Democracy to the Middle East, etc.

We now find ourselves all alone, no one is coming to help us.

Will the stimulus package work?

Will the coming Health Care reform work?

Will the Military need retooling after Iraq?

War with Iran?

I think we are beyond the Abyss, we need to focus on what is in America's best interest and what we can afford.

Also, apply that to your own situation because IMHO, no one in Washington has a clue.

[J]

Colonel,

One of the difference today versus the 1929 depression era, is that today less than 10% of the nation have the ability to feed themselves. At that time in cities there were block milk cows, chickens, and gardens in the big cities.

If big oil went 'gulg' and the gasoline/diesel dried up, how many would be able to hitch a team of horse/cows together for a buckboard or wagon? I remember my father talking about how he and his family traveled with a wagon pulling a milk cow in tow.

What cities and towns need to do is work togeather to feed each other and take care of one another as one big extended family. After all, we are Americans and historically we pull together in times of distress.

Flour, our forefathers many of which did not have access to wheat, but did have a potato garden. Potato flour makes a tasty bread.

A horse provides many 'comforts', one can pull a buggy, or small buckboard in addition to letting you ride on its back. And the 'end result' of the horse's feed bag, can heat a pot belly stove.
And if you have a mare with a foal, the foal won't mind sharing its milk if you don't get carried away. The Mongols still milk their mares as well as their cows and goats.

[Minnesotachuck]

As a regular reader of Krugman's semi-weekly NYT column and his blog at the same venue, he comes through loud and clear that what President Obama proposed initially was likely inadequate, and that the package has been negotiated downward from there.

A couple of days ago a friend who is a state legislator here sent me a link to a video entitled "Crash Course", which is a presentation on the crisis the author, Chris Mortenson, believes the world, and this country with it, will face in the not too distant future, and what each of us can do to prepare for it. Having been a close observer of the energy businss during my career, as well as being afflicted with the curiosity to stick my nose into numerous other things over the last half century, I find his views entirely plausible. I believe that the "Crash Course" video, which takes 3+ hours to view in its entirety, is an abridgment of a longer seminar that he gives in person. I strongly recommend it. You can find it here: http://tinyurl.com/66vzgt

You can read about the author and find out more about what he hopes to achieve by clicking on "About" at the link.

[frank durkee]

Col. Take a look at a Krugman Blog at the NYT last week on the differential between the US potential production and the actual production. The stimulous according to him is meant to fill the hole between the two. His view as I recall is that the House bill amounted to about one half or slightly less of what was needed. Less than enough tends, as he sees it, to fail and move us toward a deflationary situation. Add to that the disparity between the number of jobs created by direct spending and tax cuts [roughly around 1/2 as many ] and the recent politics in D.C. is almost criminal.

[frank durkee]

I love Rothko and the one you picked is perfect fo that post.
Thanks

[Jim & Dog]

Until global weather modification becomes a transparent topic there will be no trust in our stock market, banks or Government. When the public can’t make reason of the weather extremes it just adds to uncertainty. With common sense I figured it out and now have shadows 24/7. So much for “Free Speech”.

PL--- Thank you for sharing your World experiences with us, I and the World are better for having read them over the years.

[alnval]

Col. Lang:

My only disagreement with your assessment is your last sentence.

To me, your suggestion that if we do fall into the abyss that we will all need to "look to our situations" carries with it the awful implication that the only result will be total anarchy with every man for himself.

At an intellectual level, I can't afford to agree with you. At an emotional level, however, I worry that you may be right.

[Mongoose]

Maybe it's not a completely accurate comparison, but Thomas Kuhn's notion of a scientific "paradigm" may capture some of what's going on here. In general I don't favor reductionism; however, I'm going to be reductionist, i.e, the notion of an old versus new paradigm might be an appropriate way to describe how House & Senate Republicans (I'm not exempting the Dems either) (mis)understand our current economic situation. To simplify: Kuhn argued that scientific revolutions occurred when scientists working in an "old" paradigm kept puttering around trying to solve questions that had pre-occupied them for years--they continued to answer questions but some answers eluded them precisely because that paradigm blinded them to the fact that some questions couldn't be answered in it. The pieces of the puzzle not yet in place didn't correspond to the remaining pieces not yet fitted together. Then along would come some young scientific whiz(zes), unbeholden to the old paradigm, who would generate a new paradigm that answered the old questions previously left unanswered and, by the way, left lots of work to be done putting together the puzzle of the new paradigm. (Example: Newtonian Mechanics vs. Eistein's General & Special Relativity).

Perhaps something vaguely similar is underway now not only amongst our politicians but many economists who practice the dismal science. I'm clearly not bright enough to know if a new economic paradigm is emerging but it seems clear enough to me that the Republican paradigmatic mindset--oops, I mean "solution" (tax cuts, tax cuts, & more tax cuts) is not the answer. Perhaps spending in the Keysenian mould isn't the answer either, but it really hasn't been explored as an option much, if at all, over the last 30 years. Maybe we need Keysenianism on steroids right now, I don't know. I would wager, however, even though I'm an economic incompetent, that splitting the difference, as the so-called Senate moderates did yesterday is no solution to our current dilemma.

[FB Ali]

Chris Hedges sees something similar happening. See

http://www.truthdig.com/report/item/20090202_its_not_going_to_be_ok/

[Cieran]

Colonel:

Excellent analysis, as always.

My $0.02 worth is that a lot of what we cherish about our country (and perhaps ourselves) is not necessarily going to come out of this mess alive. We're still heading in too many wrong directions (e.g., empire, exceptionalism, partisanship) to make the changes we need in the diminishing time remaining for us to make them.

I believe that things are going to hell in a handbasket at an increasingly rapid rate. My favorite indicator of how rough it's getting out there is that only a couple months ago, my e-mail spam filter used to catch tons of spam advertisements for cialis and viagra -- and now it's chock full of ads for prescription anti-depressants and sleep aids instead.

Well, at least the spammers are paying attention to the zeitgeist... but will Congress?

[rcthweatt]

Over the past two weeks, I nave seen a sharp drop in road traffic in and around NYC; the long lines of tractor trailers waiting to cross the George Washington Bridge going north on I-95 are gone; Friday afternoon rush hour was like a Sunday. I have never seen anything like this- it is eerie, frightening-it implies Krugman may be wrong, we're not on the edge, we've just gone over it.

Worrying about the deficit right no is like worrying about the water bill in the middle of a fire. Standard(empirical) macroeconomics, history, and common sense all tell us the stimulus is too small, that Senators Nelson, Collins, and(alas)Webb have made a serious blunder-one they may soon be forced to correct by their hard-pressed home States. It should be obvious that, at the very least, State and local gov't must not be forced to cut services and employment or raise taxes; yet the Senate has just cut $40B from the States. What we have here is a failure to imagine how bad things can get. We boomers grew up in the safety of the New Deal, which was specifically designed to prevent Depressions. We got rid of a lot of it. We were fools.

[frank durkee]

Mongoose. There was a paradigm shift with the development of Milton Friedmans point of view and the so called Chicago school. Essentially it posits that the "market" is virtually always a better allocator of capital and resouces than the government, that regulators not only distort the : Greenspan. Combine that with the hardcore Republican desire to dismantle the New Deal legacy and replace it with "the ownership society" and you have in brief the new paradigm. Add "government is the problem not the soloution" to complete it. So tax cuts and small government become the mantras.
However when that paradigm's apostle, Greenspan, admits that prudence did not keep the large institutions from violating their responsibilities and he i "shocked" by that you have a summary of what went wrong in the last few years. thus too great trust in mathematical models, new products, and exploitation of the opener regulatory enviornment and you have greed running to excess. You also have a failure to understand how we numans actuall y operate as contrasted with "the rational economic man" basis of traditional economic theory.
Or
you can reme,ber Adaam Smiths comment to the effect that when any two or more businessmen are gathered together they immediately seek to act against the common good and subvert it for their advantage.

[frank durkee]

See Krugman;s blog in the NYT today, Saturday, Under "Conscience of a Liberal" on the Opinion page for his further take on this.

[castellio]

Have you ever wondered why there is no American commercial shipping industry? I mean, world's largest economy, oceans on both sides, trading nation.. How is it that Japan and South Korea are the largest builders of boats? They have few raw materials, expensive energy.

Is it all just low wages? No, not anymore, not in those sectors of the Asian economy. Pretty comparable, actually.

How about return on capital?

Ahh, the American shipbuilders prefered working for the American military, where there are cost plus contracts that run without end. The commercial shipbuilders either became, or were bought out by, the military shipbuilders.

And when the US government finally looked at the international trade imbalance in the shipbuilding industry, its enlightened conclusion was to insist that more work be done to sell American made naval vessels.

So the cure to the trade weaknesses of a militarized society was to militarize other societies as well !!

If the US can't stare down its military, and can't stop giving wasted money to its capitalist class, it can't build up its economy. That simple.

Unless it only wants to sell arms.

[Leila Abu-Saba]

I have been reading Sharon Astyk's blog for a couple of years now.

http://sharonastyk.com

She has written one book titled Depletion and Abundance, and another on farming (for survival etc.) is forthcoming.

She has been counseling preparedness for big, big disaster - economic and ecological - for years now. She is a peak oiler but you don't have to believe the oil is running out to see the usefulness of many of the measures she recommends.

Search within her site for articles on food storage, gardening, emergency supplies, and adapting to a much straitened economy. For a while I was saving my husband's old blue jeans to cut down into new pairs for my sons come the Collapse, until we decided that it was weird to hold onto them. I don't know, maybe I should have. Sharon keeps a houseful of second hand shoes and clothing etc. for her small, growing boys to use in later years.

If I were fully healthy and fifteen years younger I would buy a nice homestead in a decent-sized college town in the eastern Midwest: Ohio, Indiana, maybe western PA. Someplace with enough rain fall, good water supplies, good soil, where the land and housing are cheap and yet there are still towns and roads and railroads. Maybe near the Erie Canal? Even Buffalo (or Syracuse) in its extremis is starting to make sense. I don't consider NC, where I have lots of relatives and my mother owns property, because of the severe drought.

However with my health issues, elderly mother & MIL, husband wedded to the Bay Area, I don't think we're going to be reverse pioneers. We're going to shelter in place and take our chances in the Bay Area. It could get dicey. I trust in God.

But I do have a goodly supply of staples in the cupboards, on Sharon's warning. And if things get really bad, we can plant chard and sweet potatoes in the yard, install some chickens where the raccoons can't get em. Guess if it gets REALLY bad we'll be hiring the neighbors to shoot and stew the raccoons.

I think we have a long way to go before we are trapping the local vermin for protein, or buying shotguns to keep marauders at bay, but I am indeed ready for almost any possibility.

Meanwhile, I've been invited to a gala dinner at the public library and am going to go off and hobnob with the literati and moneybags of Berkeley, and eat and drink of the best wine and food available in our for-now abundant state. What economic crisis?

[Highlander]

Colonel,

"On the edge" my ass.

"Staring into the abyess" Well let's all do the Y2K panic syndrome all over again.

I'm just a poor provincial business man without all the magical insights of NYC or DC. But I do have lots of my own dollars on the line in several enterprises.( some are OK, some (the real estate mainly) are locked up.

Including the mid 80's commercial real estate crunch this is the 8th one of these economic dust ups I've been through as an adult.

In the 79 to 82 period interest rates stayed above 10% and topped at 19% inflation topped at 15%. In our current "staring into the abyess" situation long term interest rates are at 5% and inflation is 0 to 2%. Oil prices are aproximately 50% lower than they were this time a year ago.

In 1980 the Iranian's were "Bitch Slapping" Jimmy Carter, and in essence telling America to stuff it". Today we are the acknowledged dominant power in the world. For all practible purposes unchallenged on the land, air, and sea.

In 2009 You don't see real national leaders doing any "bitch slapping" because they all are acutely aware of the consequences of crossing the Imperial power of the USA.(for instance a predator drone firing a Hellfire missle into your bubble bath while you are in it).

Dig up Saddam Husssien and ask him how it worked out for him when he decided to do his oil deal with the Chinese?

[FredS]

Nothing like watching Casablanca to put you in the mood to read your latest blog entry. The economy lost 500,000 jobs last month; but not a single millionaire blow hard on that 24/7 news you have running in the background is out of work. (Including the mad money guy who said Bear Sterns was sound just weeks before going bust.)

Time to 'round up the usual suspects':“The Republicans do not want to spend money uselessly?” Yes, the war in Iraq is worth $1 trillion and the lives of thousand who have joined the ranks of our honored dead; it’s just not worth a single tax cut from our sacred rich.

It is long past time for Obama to show some ruthlessness of his own. The Republicans want to stop spending, then close the federal offices in each of their districts and cancel the contracts to the companies supporting them. As for Rush Limbaugh; there was a time when the he got thrown out of the RNC (I met the man who made that happen). Hopefully that history will repeat itself.

[Bobo]

Six months or so ago the World fell off that cliff. The American Citizen did something that economists had been begging for years to occur. They started saving and the era of extravagant consumerism was dead in its tracks.

Our government is now putting through a stimulus plan and a number of other similiar items to try to kick start our economy, I hope it works. I believe they need to start thinking more on how they are going to help the dispossessed and the soon to be disspossessed plus the other troubles that it will bring. Somehow when George Bush sent us that $600/$1,200 present it did not provide us the expected economic benefit. I believe that was a major omen and would be interested in economists thoughts on that.

Being a realist we need to get to the bottom of this economic trough quickly so as a country we can start climbing out of it, something we do well. The continued propping up of failed institutions is just prolonging the inevitable. Let them go bankrupt as that is the process we created for this situation. None of us like the word Nationalization but that is what we need to be doing more of to help resolve this problem and once solved revert to our normal capitalism. We are living in troubled times. God help us all.

[Arun]

A more immediate concern: I watch too much 24/7 news, particularly the business channels.

I hope that you are immune.

Glenn Greenwald on salon.com: Due to traveling, I've been subjected to far more cable news over the last 24 hours than I typically endure in an entire month.....And, just as a general note: if you watch cable television news during the daytime, you can actually physically feel your brain shrinking.

[Babak Makkinejad]

All:

The annual gloabl output is about 43 trillion dollars.

The global savings is about 148 trillion dollars.

The amount of securitized instruments is about 750 trillion dollars.

You can apply a loose banking standard of 90% financing & 10 % capital and demand the volume of securitized instruments be around 380 trillion dollars.

Thus, the total amount of un-backed financial instruments may be grossly computed to be:

750 - 380 - 148 = 222 trillion dollars.

This is the volume of un-backed (by the real economy) of financial instruments.

Clearly, it will take decades to either pay that down or else write that off.

8 trillion dollars of loss or 1 trillion dollar of stimulus is not going to make much of a difference.

[Totic21]

Not a word here about the Federal Reserve, its sneaky eleventh hour implementation in Congress back in 1913.

Nary a breath about the small little clique that runs the whole mess. Dont see the word Rothschild anywhere on this blog. Dont see Bilderberg, or CFR or any of the real economic DNA core we are dealing with.

Without that background- all other info is tangential diversion.

[china hand]

Who will revive ours? I honestly don't think they'll bother.

As i see things, the world is shifting away from the liberal and neo-liberal version of "capitalism" and "free trade" towards something less ideological.

And understand: I use that term not in the virtually meaningless sense that is currently in vogue, but in the original way: to describe the set of ideas that gave us such gems as the Opium Wars and the East India Company.

Currently, China and Russia represent the least ideological of the world's nations. That's a hard concept for folks from the U.S. and Europe to wrap their minds around, but the truth is that Euro-America's economic and cultural elite have no way of describing or rationalizing their countries' actions except with over-refined buzz-words, statistics, and hyper-intellectualized terminology that has little relationship with everyday, human activities. Humanity just isn't buying what they're selling, anymore.

Since Putin, Russia has been slowly emerging from the catastrophes that brought around Perestroika and Yeltsin, and slowly but surely discovering new methods of diplomacy that -- for the first time in a century -- aren't couched in ridiculous, pseudo-Marxist claptrap. The great, ancient Muscovite culture is rumbling on, and the era of Soviet-speak and ideological purity are long gone, replaced by a more naturalistic relationship to power.

The same can be said of China. China suffered nearly a century of internecine warfare and atrocities, all brought about as a direct consequence of Western "Liberal" policy (the Opium Wars, international settlements and treaty ports, Russian and British espionage, etc -- and how ironic that the most overt ideological excesses of that time were undertaken in the Latinate name of Freedom!). The Chinese -- and here i mean all chinese, across the world, whether in Taiwan, Indonesia, San Francisco, London or Moscow -- all remember that history quite clearly. It was simply yet another era of anarchy in that land's long mythology, and instead of helping to re-establish peace and prosperity, the West -- whether the U.S, Great Britain, France, Russia, or Germany (though also Japan) -- all consistently worked instead to exacerbate and exploit it, even as that culture slowly emerged from the chaos to rebuild itself

Neither the Russians nor the Chinese are about to let that chaos fall upon them again, any time soon. Things may get bad, but these peoples are ready to face them down with whatever means necessary, within the acceptable norms of humanity, and order.

The United States, however, has *never* experienced an era of anarchy that comes even close to what has happened in those two countries. We are now likely to experience it for the first time, and I honestly wonder if the ideals and values I was raised with will be able to survive. I mean things like: "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.", or "That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed".

For a lot of people in the U.S. these are just words. I'm not one of those, but people like Dick Cheney and Louis Farrakhan are.

But the greater point is this: China and Russia have a lot more experience with what's about to happen than does the United States. It's going to be much worse than the Great Depression, and frankly i worry that it may be quite close to the Civil War.

Under any circumstances, it's going to be China, Russia, and Iran -- with the help of Europe, but not its unqualified leadership -- who will fill in the void. The political winds are re-aligning to something closer to the 1850's, when Europe was only an upstart partner bickering with Persia, Turkey, China and Russia. The U.S. is utterly unprepared for such an eventuality, and if it continues to be so then it will be shut out just as completely and surely as China has ben, these last fifty years.

I think it's time for folks in the U.S. to start considering the possibility that very soon the world may decide it doesn't want them any more -- and what the consequences of that may mean. Unfortunately, i see no-one in our leadership who is capable of such hypothesizing. Certainly not that moron Biden, nor even Ms. Hillary.

What is needed isn't ruthlessness, or violence. What we need now is statesmanship and nation-building. The foundations of U.S. society have been slowly eroding, now -- ever since Jim Crow was enacted, and even more quickly since the spate of assassinations in the late 60's-early 70's.

The U.S. is a fractured society of various peoples. We are teetering on the brink of a great fall; "E Pluribus Unum" is what's stamped on our great seal, and the fact is that the people of the U.S. are anything but united right now.

War isn't going to do it. "Hope" that finances the collaborative corruption of Washington and Wall Street won't do it; our oversized military isn't going to do it. But someone needs to, because if the U.S. doesn't pull itself together, the world won't fall apart -- only the U.S. will. Everyone else will turn with even greater force towards the two nations which they are currently in the process of happily re-discovering: China, and its junior partners, Russia, and Iran.

And with that, a truly new World Order will emerge.

[Leila Abu-Saba]

I can report that the literary dinner was lovely. All booklovers would feel transported at eating great food in the middle of a beautifully restored 1920s library. My hosts, who have attended this event yearly since its inception, tell me that the food this year is much less luxurious. No oyster bar this time; olive bar with cheese and peppers and mushrooms on toast round instead. BUt the wine was local, the food and dessert delicious, and our gift bags were cotton canvas and included books by the authors sitting at our tables.

In Berkeley the moneybags are ex- and current socialists. They throw their money at the library, the local co-op bakery, the Democratic party; one dowager founded the Chaplaincy for the Homeless. I felt I was eating and carousing with the right folk. The man who bought our table is going to Washington next week to parley with Krugman et al; he wants congress to raise the minimum wage as part of the stimulus.

[Cold War Zoomie]

Highlander has a point, although a bit more extreme than mine. It's bad, but more like purgatory than the abyss. We are paying for the consequences of our financial sins. This too shall pass like all the others, and not as badly as the Depression since some of the most important institutions built back then are still with us.

[Redhand]

We boomers grew up in the safety of the New Deal, which was specifically designed to prevent Depressions. We got rid of a lot of it. We were fools.

It would not surprise me if we fell into another full blown economic Depression, in which many of us (me included) lose everything.

The insane greed on Wall Street and in corporate America, and the craven complicity of the Congress in promoting it, are the two pillars of the problem.

Throughout my entire adult life CEO wealth accumulation has depended not on creation of actual value but the illusion of it. Consider the S&L crisis and Milken's junk bonds in the 1980s; the "tech bubble" in the 1990s; Enron and the string of corporate scandals at the turn of the century that spawned Sarbanes-Oxley; and now this, the greatest real estate bubble/stock Ponzi scheme of all.

I'll call a spade a spade. Although Democrats have in many cases been complicit, the GOP is the party responsible for the deregulation that has destroyed our economy. http://en.wikipedia.org/wiki/Phil_Gramm>Thank you, Phil Gramm.

Even now the GOP worthies in the Senate and House are utterly blind; even as our economy goes over Niagara Falls they still decry "excess spending" and defend tax cuts [for the wealthy]. Some of them are http://www.politico.com/blogs/glennthrush/0209/Some_GOP_Sens_hate_CEO_pay_caps.html?showall> even bemoaning the cap on executive pay for bailed out banks as "un-American."

I've had it with GOP obstructionism. We need a second New Deal, and bedrock reform of the utterly rotten politico-economic system that created this catastrophe.