Crisis in Economic Thought

Myths of free trade and protectionism

Criton Crisis in Economic Thought

In October 1913, the United States broke with a solid 124-year-old protectionist tradition and enacted the Underwood-Simmons Tariff Reduction Act, lowering import tariffs by an average 5.1 percentage points.  Eight months later, in June 1914, World War One was triggered; but nobody ever thought of blaming America’s flirtation with “free trade” for the Great War.

In June 1930, the United States enacted the Smoot-Hawley Act that raised import tariffs by an average 3.6 percentage points.  The stock market had already crashed eight months earlier, in October 1929, triggering the Great Depression.  Yet there are people who to this day blame the Great Depression on the “protectionism” of the supposedly protectionist Smoot-Hawley Act that took effect long after the Great Depression had begun.

Raising tariffs does not cause depressions, any more than lowering tariffs causes war. Continue reading →

Debt and Civilization – Part 1 (An Overview)

Criton Crisis in Economic Thought, Worldview and Social Behavior

“There is simply too much debt in the world today.”

Jaime Caruana, General Manager, Bank for International Settlements

June 27, 2014

One year ago, when total global debt had reached its highest level in human history both in absolute terms ($199 trillion) and as percent of global output (286%), the Bank for International Settlements (BIS – the global economy’s central bank of central banks) concluded that “there is simply too much debt in the world today,” warning that the global economy is more vulnerable to collapse now than it was prior to the 2008 failure of Lehman Brothers.

Remarkably, the BIS had also warned as early as 2003 that the global debt of financial institutions and households was becoming “too much”, predicting that if not curbed it would lead to financial crisis. When BIS warnings went unheeded and the predicted crisis finally arrived in 2008, a complete meltdown of the global economy was barely avoided through massive new debt issuance when governments borrowed trillions to bail out private financial institutions.

The result has been that the original debt crisis of 2008 has grown to be a much greater menace to the world economy today. The size of the crisis has reduced the world’s private financial industry to an impotent dependent on government subsidies, as these taxpayer-funded subsidies to private financial institutions resulted in an explosion of government debt from $33 trillion in the beginning of 2008 to nearly $60 trillion today.

The world responded to the private debt crisis of 2008 with a tsunami of government indebtedness that has nearly doubled global sovereign debt, leaving governments enfeebled by over- indebtedness and weakened revenue raising capacity, unable to generate effective policies, and running out of time, money and legitimacy.

The colossal size of global debt makes today’s debt crisis a crisis of civilization. It is a crisis that can neither be understood nor addressed effectively without a comprehensive inquiry into the links between debt and civilization as these have unfolded from the dawn of history. Continue reading →

Does Europe Need Debt Relief?

Criton Crisis in Economic Thought

In response to a question posed at a forum by The International Economy magazine in its Spring 2015 issue:

Debt relief per se will do nothing to solve Europe’s problems, and could exacerbate them.  Under current political circumstances, debt relief would penalize pensioners and other fixed-income groups, reward the incumbent governments’ fiscal profligacy, and do nothing to stimulate growth while failing to make the total debt burden sustainable.

Continue reading →

Will America Soon Have an Inflation Problem?

Criton Crisis in Economic Thought

In response to a question posed at a forum by The International Economy magazine in its Spring 2015 issue:

Not a chance. Fed policy since 2008 has been to tilt against powerful deflationary forces that have yet to abate. How powerful are those forces? Consider this: from September 2008 to date, the monetary base has increased by 336%, from $0.94 trillion to $4.1 trillion, yet the annual CPI growth declined from 5% in September 2008 to a negative -0.1% in February 2015. So, we are talking about quite powerful underlying deflationary forces that will not go away.

Continue reading →

Time for the Big Questions

Criton Cognition and Social Behavior, Crisis in Economic Thought

The following was my final report to clients in the financial industry dated December 22, 2014 when I retired and shut down my economic research firm, Leto Research, LLC in order to pursue broader questions arising from the global debt crisis. It summarizes the reasoning that prompted the explorations reflected in the occasional posting of this website, suitably named Leto Postscripts to denote a continuity of concerns from my previous professional life as an economic researcher:

On November 5, 2008, two months after the eruption of the financial crisis, Queen Elizabeth II asked the director of research at the London School of Economics “Why did nobody notice it?” Continue reading →