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).

December 05, 2019
Colin Todhunter
Don’t Look, Don’t See: Time for Honest Media Reporting on Impacts of Pesticides
Nick Pemberton
Gen Z and Free Speech
Bob Lord
The U-Turn That Made America Staggeringly Unequal
Josh White
The Most Important Election in British History
Daniel Warner
The Hillsborough Soccer Tragedy: Who is Responsible?
Dean Baker
The Big Deal in Warren’s Prescription Drug Plan
George Ochenski
Another Utility Disaster Headed Our Way
Binoy Kampmark
Spying on Assange: the Spanish Case Takes a Turn
Victor Grossman
Big Rallies and Big Differences in Germany
L. Ali Khan
A Playboy Misrules Pakistan
William J. Astore
How American Exceptionalism is Killing the Planet
Susie Day
The Mad Activist Impeaches Western Culture
Andrés Castro
Look Out for the Drift
December 04, 2019
Jefferson Morley
RIP Fred Hampton: a Black Visionary Assassinated by the FBI
Vijay Prashad
Wealthy Countries’ Approach to Climate Change Condemns Hundreds of Millions of People to Suffer
Kenneth Surin
The Tory Election “Campaign” to Date
Maria Paez Victor
Indians Shall Not Govern
Peter Lackowski
Bolivia’s Five Hundred-Year Rebellion
Dave Lindorff
Billionaire Entitlement Run Amok: the Case of Michael Bloomberg
Doug Johnson Hatlem
Is Corbyn for Christmas Just Another Stove Pipe-Dream?
Howard Lisnoff
Elizabeth Warren: Savior of a Fallen System?
Robert Fisk
The Remembrance Poppy is Becoming a Weapon Against Immigrants to Canada
Dean Baker
NAFTA was About Redistributing Wealth Upwards
Richard Greeman
French Unions and Yellow Vests Converge, Launch General Strike
Binoy Kampmark
Legitimised Surveillance: Kim Dotcom’s Case Against GCSB
Walter Clemens
Goodbye Law and Morality, Welcome Pretend Tough!
Sam Pizzigati
Football Without Billionaires? Why Not?
Anthony Giattino
Royal Forests of America
December 03, 2019
Richard Lachmann
Can the US Get Out of Its Endless Wars?
Ramzy Baroud
Israel’s Unfinished ‘Coup’
David Rosen
The Dialectics of Postmodern Sexual Identity
Robert Fisk
Reporting Syria: I Talked to Everyone, Except Assad
Patrick Cockburn
Why the Resignation of Iraq’s Prime Minister May Not Stop the Mass Uprising on the Horizon
Norman Solomon
For Corporate Media, It’s ‘Anybody But Sanders or Warren’
Bob Scofield
Uruguay Turns to the Right
Joe Emersberger
Talking About Ecuador’s Political Prisoners: an Interview With Marcela Aguiñaga
Medea Benjamin
Trump Was Right: NATO Should Be Obsolete
Nyla Ali Khan
Lesson in Diplomacy for India’s Consul General Sandeep Chakravorty
William Gudal
The Bubble Machine
Gaither Stewart
Dirty Hands
Peter Certo
End the Wars, Win the Antiwar Vote
Binoy Kampmark
The Liveris Formula: Dow’s Inclusive Capitalism
Dan Bacher
California Freezes New Fracking Permits – But All Oil Drilling Permits Still Outpace 2018
Kay Sather
Can’t Get No Satisfaction?
December 02, 2019
Rob Urie
Ukraine, the New Cold War and the Politics of Impeachment