How the Economy Will Die

The prevailing understanding of economic troubles in the U.S. and Europe, the world’s two largest economies, is misunderstood in a number of ways. First: Imagine that you are driving a car down a road packed with snow and ice and you are worried about an accident. At the same time you are ignoring the fact that you are about to run out of gasoline, leaving you stranded and freezing in the middle of nowhere.

Such have been the main reactions to last week’s extreme volatility in financial markets: There has been much more fear of financial crisis than the slow strangulation that poses the greater risk. Investors’ panic attack subsided noticeably after the European Central Bank’s (ECB’s) decision to reverse its prior stance and purchase some 22 billion euros of Italian and Spanish bonds, which was successful. It drove down interest rates on these bonds by more than a full percentage point, to 5 percent, and eliminated –for now at least – the most immediate threat of an acute financial crisis: the one that emanated from the fear that markets would drive up interest rates on these bonds to a dangerous level.

The European authorities also took some action to stem the immediate crisis of the European banks, which is of course related to the sovereign debt problems: France, Belgium, Italy, and Spain banned short-selling of the stocks of financial institutions. According to some press reports, speculators were shorting these stocks partly because the ECB was committed to keeping a floor under the euro, leaving the bank stocks as a “soft target.” The ban on short selling seems also to have helped, at least temporarily.

But there is still a lot of fear that we are close to a repeat of 2008-2009, when the U.S. fell into a deep recession and much of the world economy was dragged down with it. For the U.S., this is not all that likely: The Great Recession was caused by the bursting of an $8 trillion housing bubble, and there is no such bubble now available to burst. The recession before that (2001) was also caused by the bursting of a big asset bubble – in the stock market, which is not currently overvalued. The three recessions before were brought on by the Federal Reserve deliberately raising interest rates in order to slow the economy; but the Fed last week committed itself to keeping interest rates “very low” for two more years.

Of course, if unemployment remains at 9.1 percent or worsens, it will feel like a recession to most Americans even if we don’t have negative growth. But the probability of an actual recession has been exaggerated, and the chance of a recession like the last one is very remote.

In Europe, where macroeconomic policy has been more right wing, recession is more likely. Portugal and Greece are already in recession, and others are not far away. In return for the ECB’s buying up Italian bonds, the European authorities extracted a promise from the Berlusconi government to close a 3.9 percent of GDP budget gap by 2013. This could easily push Italy’s $2 trillion economy into recession. The latest GDP numbers for Europe’s second quarter arrived this week, and they look dismal: just 0.2 percent growth in the second quarter in the eurozone, the worst for two years. Germany, Europe’s largest economy, was practically stalled at 0.1 percent, and France, the second largest, came in at zero.

The most dangerous myth, and one repeated daily in much of the major media, is that these troubles on both sides of the Atlantic are a result of a “debt crisis,” and can only be resolved through fiscal tightening. The United States is not facing any public debt crisis at all, with interest payments on the debt at just 1.4 percent of GDP. Some eurozone countries do have a “debt crisis” – for example Greece. But this is only because the European authorities have failed to take the necessary steps to resolve it, and have instead made it worse by shrinking the economy. In other words, there is no legitimate economic reason for a sovereign debt burden – even an unsustainable one – to result in years of economic stagnation and high unemployment. If the debt needs to be restructured because it is not payable, as in Greece, then that should be done as quickly as possible and with enough debt cancellation to make the resulting debt burden sustainable – as Argentina did with its successful default in 2001.

The eurozone is of course handicapped by the lack of a unitary fiscal authority, and many were disappointed that this week’s meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel did not move toward the use of eurobonds. Much worse was their pledge to push for a Europe-wide balanced-budget amendment, starting in their own countries. This is ridiculous and – to the extent that it is not mere posturing – would only be another indicator of how far Europe’s leaders are from reality-based economic policy.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This column was originally published by the Guardian.

More articles by:

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

Weekend Edition
July 10, 2020
Friday - Sunday
Lynnette Grey Bull
Trump’s Postcard to America From the Shrine of Hypocrisy
Anthony DiMaggio
Free Speech Fantasies: the Harper’s Letter and the Myth of American Liberalism
David Yearsley
Morricone: Maestro of Music and Image
Jeffrey St. Clair
“I Could Live With That”: How the CIA Made Afghanistan Safe for the Opium Trade
Rob Urie
Democracy and the Illusion of Choice
Paul Street
Imperial Blind Spots and a Question for Obama
Vijay Prashad
The U.S. and UK are a Wrecking Ball Crew Against the Pillars of Internationalism
Melvin Goodman
The Washington Post and Its Cold War Drums
Richard C. Gross
Trump: Reopen Schools (or Else)
Chris Krupp
Public Lands Under Widespread Attack During Pandemic 
Alda Facio
What Coronavirus Teaches Us About Inequality, Discrimination and the Importance of Caring
Eve Ottenberg
Bounty Tales
Andrew Levine
Silver Linings Ahead?
John Kendall Hawkins
FrankenBob: The Self-Made Dylan
Pam Martens - Russ Martens
Deutsche Bank Fined $150 Million for Enabling Jeffrey Epstein; Where’s the Fine Against JPMorgan Chase?
David Rosen
Inequality and the End of the American Dream
Louis Proyect
Harper’s and the Great Cancel Culture Panic
Thom Hartmann
How Billionaires Get Away With Their Big Con
Your 19th COVID Breakdown
Danny Sjursen
Undercover Patriots: Trump, Tulsa, and the Rise of Military Dissent
Charles McKelvey
The Limitations of the New Antiracist Movement
Binoy Kampmark
Netanyahu’s Annexation Drive
Joseph G. Ramsey
An Empire in Points
Kollibri terre Sonnenblume
COVID-19 Denialism is Rooted in the Settler Colonial Mindset
Ramzy Baroud
On Israel’s Bizarre Definitions: The West Bank is Already Annexed
Judith Deutsch
Handling Emergency: A Tale of Two Males
Michael Welton
Getting Back to Socialist Principles: Honneth’s Recipe
Dean Baker
Combating the Political Power of the Rich: Wealth Taxes and Seattle Election Vouchers
Jonah Raskin
Edward Sanders: Poetic Pacifist Up Next
Manuel García, Jr.
Carbon Dioxide Uptake by Vegetation After Emissions Shutoff “Now”
Heidi Peltier
The Camo Economy: How Military Contracting Hides Human Costs and Increases Inequality
Ron Jacobs
Strike!, Fifty Years and Counting
Ellen Taylor
The Dark Side of Science: Shooting Barred Owls as Scapegoats for the Ravages of Big Timber
Sarah Anderson
Shrink Wall Street to Guarantee Good Jobs
Graham Peebles
Prison: Therapeutic Centers Or Academies of Crime?
Zhivko Illeieff
Can We Escape Our Addiction to Social Media?
Clark T. Scott
The Democrat’s Normal Keeps Their (Supposed) Enemies Closer and Closer
Steve Early - Suzanne Gordon
In 2020 Elections: Will Real-Life “Fighting Dems” Prove Irresistible?
David Swanson
Mommy, Where Do Peace Activists Come From?
Christopher Brauchli
Trump the Orator
Gary Leupp
Columbus and the Beginning of the American Way of Life: A Message to Indoctrinate Our Children
John Stanton
Donald J. Trump, Stone Cold Racist
Nicky Reid
The Stonewall Blues (Still Dreaming of a Queer Nation)
Stephen Cooper
A Kingston Reasoning with Legendary Guitarist Earl “Chinna” Smith (The Interview: Part 2)
Hugh Iglarsh
COVID-19’s Coming to Town