The mainstream media has gradually moved from discussing a jobless recovery to the “Great Recession” and is now beginning to contemplate a Great Depression 2.0. Robert Samuelson is among the first:
It is now conventional wisdom that the world has avoided a second Great Depression. Governments and the economists who advise them learned the lessons of the 1930s. When the gravity of the financial crisis became apparent in late 2008, the response was swift and aggressive. Central banks like the Federal Reserve and the European Central Bank dropped interest rates and lent liberally to threatened financial institutions and rattled investors. The United States and many countries approved “stimulus” programs of tax cuts and additional spending. Panic was halted. A downward spiral of falling private spending and rising unemployment was reversed. The resulting economic slump was awful. But it was not another Great Depression. The worst has passed.
Or has it? Greece’s plight challenges this optimistic interpretation. It implies that celebration is premature and that the economic crisis has moved into a new phase: one dominated by the huge debt burdens of governments in advanced societies. Comparisons with the Great Depression remain relevant — and unsettling. Now, as then, we may be prisoners of deep and poorly understood changes to the world economic system.
As I explained in the book, the problem is debt combined with the fact that neither Keynesian nor Monetarist economics place much significance on it. Even now, you will find some stubborn neo-Keynesians insisting that debt is good, that it cannot possibly be the root of the problem. As Karl Denninger has repeatedly shown, their attempts to explain the situation demonstrate little more than their ignorance of simple mathematics as well as political economy.
The massive sovereign debts can never be repaid. Nor can many of the private and corporate debts. So, once the burden of servicing them becomes too great, they must be eliminated with either default or hyperinflation. The frantic efforts of the various Western governments to shovel nearly $1 trillion into the maws of the desperate bankers is little more than an attempt to buy a little more time in the futile hope that the magical revival of Keynesian animal spirits will trump the inexorable mathematics.