The core problem of this financial crisis, which also explains how we got in this mess

Summary:  we have a bad case of debt deflation.  Although well-described by economists since the 1930’s, this malady was not taken seriously by the mainstream of the profession.  Now we have it.  This post describes this macroeconomic illness (which will help you better understand events), and possible cures.  The diagnosis is simple; the cures less so.

A preamble

Before we begin this depressing discussion of our current ills, let us remember the dismal odds accepted and surmounted by the Founding Fathers.  We can hope to earn similar praise from our descendants as John Hancock gave to George Washington in his letter of 9 October 1777, in which Hamilton stated his satisfaction that Washington had done everything possible at the battle of Germantown:

Something must still be left to Fortune. It is not in Mortals to command Success. But permit me to say, Sir, you have done more on this Occasion, You have deserved it.

— From The Writings of George Washington from the Original Manuscript Sources, 1745-1799, Volume 9 , John C. Fitzpatrick, Editor (page 351).  This is a quote from Act I, Scene 2 of the play Cato by Joseph Addison.

The core of our crisis

We borrowed too much.  As I explained here, there are only four ways to solve this problem.

  1. grow out of the debt
  2. inflate the debt away
  3. default on the debt
  4. socialize the debt — spread it out over a larger population, such as having the government assume the loans

Debt deflation is path #3.  The US government is attempting to switch the economic train to track #4.

As I described here, the debt deflation was initiated by the Fed’s tight money policy during the rise in commodity prices (that was just the spark, of course).  While this should be obvious to anyone reading the newspapers, it remains contraversal among economists — and is evidently not widely known among educated Americans.  The responses to my posts predicting that we would slide into debt-deflation, and those saying that we have done so, ranged from incredulous to hostile.

“Rising loan defaults and failure of financial institutions do not describe anything “deflationary”.

… (one of the less-abusive comments from this source)

We are suffering from a paradigm crisis

Why is our bout of debt deflation so surprising?  For 30 years one explanation (perhaps the standard one) of the US great depression has been that the Fed did not adequately respond to the deflationary effects of the 1929-1932 loan defaults and bank failures. Chairman Bernanke is an expert on the history of this period. Perhaps his best-known speech on the topic is “Money, Gold, and the Great Depression” (2 March 2004). Excerpt:

However, in 1963, Milton Friedman and Anna J. Schwartz transformed the debate about the Great Depression. That year saw the publication of their now-classic book, A Monetary History of the United States, 1867-1960. The Monetary History, the name by which the book is instantly recognized by any macroeconomist, examined in great detail the relationship between changes in the national money stock–whether determined by conscious policy or by more impersonal forces such as changes in the banking system–and changes in national income and prices.

… The banking crisis (of the 1930’s) had highly detrimental effects on the broader economy. Friedman and Schwartz emphasized the effects of bank failures on the money supply. Because bank deposits are a form of money, the closing of many banks greatly exacerbated the decline in the money supply. Moreover, afraid to leave their funds in banks, people hoarded cash, for example by burying their savings in coffee cans in the back yard. Hoarding effectively removed money from circulation, adding further to the deflationary pressures.

But, to oversimplify, this explanation conflicts with core Keynesian theory.  Keynes did not consider aggregate debt levels to be an important macroeconomic parameter; and his successors did not remedy this oversight.  So US household debt levels grew and grew, with mainstream economists complacent or asleep.

From this perspective, our problems result from a Thomas Kuhn-type paradigm crisis in economics, a conceptual blindness to the danger of rising debt.  There was an alternative theory, which now plays itself out in our daily news.  We must understand it in order to have any chance of weathering this storm.

Debt Deflation

For a clear explanation of our illness I recommend reading “Debt-deflation: concepts and a stylised model“, Goetz von Peter, BIS, April 2005 (56 pages).  The following four sectors are taken from that paper.

(1)  Introduction

In this paper we explore the concept of debt-deflation. We propose a stylised model to illustrate its key features, including unexpected losses, distress selling, and distributional effects. These features reflect the central place that financial distress occupies in traditional accounts of deflation. The term debt-deflation was coined by Irving Fisher (1933), and refers to the way debt and deflation destabilise each other. The issue of stability arises because the relation runs both ways: deflation causes financial distress, and financial distress in turn exacerbates deflation. The former was known for centuries, but the latter was, in our view, a key insight of the debt-deflation literature. This ‘feedback’ from financial distress to deflation can occur through several channels:

Fisher (1933) argued that borrowers attempting to reduce their burden of debt (‘indebtedness’) engage in distress selling to raise money for repaying debt. But repayment in aggregate causes a contraction in the money supply and price level deflation.

Minsky (1982) elaborated the concept to incorporate the asset market. He recognised that distress selling reduces asset prices, causing losses to agents with maturing debts. This reinforces distress selling and reduces consumption and investment spending, which deepens deflation.

Bernanke (1983) observed that debt-deflation involves wide-spread bankruptcy, impairing the process of credit intermediation. The resulting credit contraction depresses aggregate demand.

Note that these channels involve features that are quite uncommon in today’s mainstream macroeconomics: among them are losses and distress selling, the idea that debt and deflation destabilise each other, and the notion that the quantity of money endogenously contracts through the repayment of debt. Note also that some standard methods, including the representative agent and log-linearisation, are not well-suited for exploring this territory. This may explain the shortage of formal work on debt-deflation.

(2)  Irving Fisher:  the level of prices

Fisher sets out a monetary theory of how financial distress exacerbates deflation. Fisher’s argument starts with a state of ‘over-indebtedness’. Agents seek to reduce indebtedness by ‘liquidating’ debt. The first and most important steps in Fisher’s ‘chain of consequences’ are,

Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar.

Fisher views price level deflation as “the root of almost all the evils” that he elaborates in six further steps. Note that, rather than taking deflation as given, he explains it as the consequence of agents’ attempt to reduce their indebtedness.9 They do so by distress selling, to raise the money for repaying bank loans. Repayment in aggregate reduces the quantity of money, or ‘deposit currency’, which causes deflation. Since deflation is known to increase indebtedness, Fisher’s channel closes the loop of debt-deflation,

… and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed.

Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing. But if the over-indebtedness is not sufficiently great to make liquidation thus defeat itself, the situation is different and simpler. It is then more analogous to a stable equilibrium; the more the boat rocks the more it will tend to right itself.

— ”The Debt-Deflation Theory of Great Depressions”, Econometrica, October 1933

Fisher’s theory was largely ignored by contemporaries …

(3)  Hyman Minsky:  asset prices

Minsky’s elaboration of debt-deflation incorporates the asset market. He recognised that distress selling reduces asset prices, which (1) reinforces distress selling, and (2) worsens deflation. Regarding the first channel, Minsky wrote,

Fisher does not identify the ways a unit can get cash to repay loans that fall due. […] Once a situation exists where debt payments cannot be made either by cash from operations or refinancing, so that assets have to be sold, then the requirements imposed by the debt structure can lead to a fall in the prices of assets. In a free market, the fall in asset prices can be so large that the sale of assets cannot realize the funds needed to fulfill commitments.

— “Debt-Deflation Processes in Today’s Institutional Environment”, Banca Nazionale del Lavoro Quarterly Review, December 1982

In other words, when distress selling reduces asset prices, the resulting losses exacerbate indebtedness, and may lead to further distress selling. As in Fisher, distress selling can be self-defeating. The asset market and distress selling feed back on each other.

Regarding the second channel, Minsky argues that the fall in asset prices reinforces deflation:

If payment commitments cannot be met from the normal sources, then a unit is forced either to borrow or to sell assets. Both borrowing on unfavorable terms and the forced sale of assets usually result in a capital loss for the affected unit. However, for any unit, capital losses and gains are not symmetrical: there is a ceiling to the capital losses a unit can take and still fulfill its commitments. Any loss beyond this limit is passed on to its creditors by way of default or refinancing of the contracts. Such induced capital losses result in a further contraction of consumption and investment beyond that due to the initiating decline in income. This can result in a recursive debt-deflation process.

— Can It Happen Again? Essays on Instability and Finance (1982)

In other words, losses from the decline of asset values reduce aggregate spending through a wealth effect.

(4)  Ben S. Bernanke:  credit

Both Fisher and Minsky emphasised the consequence of financial distress for macroeconomic variables: aggregate spending, the price level, and asset prices. Another channel of feedback can arise when financial distress affects the banking system.

The banking problems of 1930-33 disrupted the credit allocation process by creating large, unplanned changes in the channels of credit flow. … {This} plus the actual failures, forced a contraction of the banking system’s role in the intermediation of credit. … experience does not seem to be inconsistent with the point that even good borrowers may find it more difficult or costly to obtain credit when there is extensive insolvency. The debt crisis should be added to the banking crisis as a potential source of disruption of the credit system. … The effects of this credit squeeze on aggregate demand helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression.

— ”Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression”, American Economic Review, June 1983.

In other words, financial distress impairs the process of credit intermediation, and a credit contraction in turn depresses aggregate demand.

{end except from the BIS study}

What’s the cure?

We do not know.  The debt deflation — deflatoin, if you prefer — of the 1930’s was cured by WWII (if you call that a “cure”).  Japan’s bout with deflation in the 1990’s was never really cured, as their quick collapse in this cycle shows.

Many naifs believe that the printing press is our salvation. This comes in many forms(the difference between fiscal and monetary policy blurs at this extreme).

  1. Keynes advocated massive debt-funded public works projects: The General Theory of Employment, Interest and Money (1936).  Build pyramids, or bury money in bottles for people to dig up — it does not matter what.
  2. Dropping money from helicopters, as described by Nobel-laureate Milton Friedman in The Optimum Quantity of Money (1969).
  3. Just print it, Bernanke tells us.  “{T}he U.S. government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” (source).

I suspect this solution, however simple-minded, will prove ineffective.  Why that is so will be discussed in another post.


Originally published at Fabius Maximus on Oct 22, 2008 and reproduced here with the author’s permission.

17 Responses to "The core problem of this financial crisis, which also explains how we got in this mess"

  1. DF   October 23, 2008 at 1:35 am

    I can t wait so see why printing debt away would not work.I ve been arguing for 5 years now, espy in comments to Brad and Noutiel, that rising debt level was a major problem and would lead to deflation.Why the economist profession decided to turn its eyes away to this phenomenon is still a mistery to me… But alas the capture of the regulators by those they are supposed to regulate is well known. Polanyii laid bare all that happens when markets are allowed to rule money creation, employment and land … We simply allowed the same mistakes than in the 19TH century. I personnaly think 90% of the economist profession should be fired, we should keep only the remaining marxists institutionalists and keynesians the rest is just junk.I still believe printing is the only solution out of debt deflation. But not only that. With it must come strict controls on private money creation. Ultimately private money creation should be very strictly regulated if not completely barred.

    • Tracey Darroll   October 23, 2008 at 10:17 am

      This is exactly why Voltaire in 1764 stated, “Common Sense is not so Common.” Many honest citizens can tell you we had too much debt except I guess the economists.There is but one sane way out of this, which is # 1. Growing the economy by encouraging our innovative and creative abilities, which Americans have in abundance compared to the rest of the world, and then #2 where this misses, we will have to follow the rest of the options in as little as possible steps, which we are on the path to doing anyway.But, most importantly, we must not give up on #1. Growing our Economy. It is America’s ace in the hole. Both monetary and fiscal policy, and social policy must all support this with a vengeance. To focus otherwise is suicidal.We created the modern American Consitutional revolution, the Industrial revolution, the Space revolution, and the Internet revolution, and we can create the Energy revolution and more if the government will encourage us tax wise and idealogically. Ideas are today’s capital. If you travel around the world, you can see that Americans are more open minded, freer in our thinking, and not scared of our government. Those are rare qualities that are shrinking in today’s world. We are the world’s leaders intellectually. Let’s appreciate our abilities, and harness them and create the goals and dreams we are truely capable of instead of shrinking behind over-intellectualized economists who don’t even recognize the true impact of debt. Mr. Roubini, thank God, is the rare exception.

      • Guest   October 26, 2008 at 6:33 am

        “We created … the Industrial revolution, … and the Internet revolution…”No you didn’t.Britain created the Industrial Revolution (seemed like a good idea at the time) and an Englishman invented the internet. And the jet engine.

        • Guest   October 27, 2008 at 12:32 am

          And the computer

        • Tracey Darroll   November 2, 2008 at 10:29 am

          You are truly missing the point and incorrect. The point is that Americans can be innovative and productive. Can you possibly agree with that?But FYI: Here is the truth on the Internet:”Fascinating facts about the invention of the Internet by Vinton Cerf in 1973. The Internet is a worldwide network of thousands of computers and computer networks. It is a public, voluntary, and cooperative effort between the connected institutions and is not owned or operated by any single organization. The Internet and Transmission Control Protocols were initially developed in 1973 by American computer scientist Vinton Cerf as part of a project sponsored by the United States Department of Defense Advanced Research Projects Agency (ARPA) and directed by American engineer Robert Kahn. The Internet began as a computer network of ARPA (ARPAnet) that linked computer networks at several universities and research laboratories in the United States. The World Wide Web was developed in 1989 by English computer scientist Timothy Berners-Lee for the European Organization for Nuclear Research (CERN).”The design of the Internet was done in 1973 and published in 1974. There ensued about 10 years of hard work, resulting in the roll out of Internet in 1983. Prior to that, a number of demonstrations were made of the technology – such as the first three-network interconnection demonstrated in November 1977 linking SATNET, PRNET and ARPANET in a path leading from Menlo Park, CA to University College London and back to USC/ISI in Marina del Rey, CA.” . -Per Webopedia : Many people use the terms Internet and World Wide Web (aka. the Web) interchangeably, but in fact the two terms are not synonymous. The Internet and the Web are two separate but related things.The Internet is a massive network of networks, a networking infrastructure. It connects millions of computers together globally, forming a network in which any computer can communicate with any other computer as long as they are both connected to the Internet. Information that travels over the Internet does so via a variety of languages known as protocols.The World Wide Web, or simply Web, is a way of accessing information over the medium of the Internet. It is an information-sharing model that is built on top of the Internet. The Web uses the HTTP protocol, only one of the languages spoken over the Internet, to transmit data. Web services, which use HTTP to allow applications to communicate in order to exchange business logic, use the the Web to share information. The Web also utilizes browsers, such as Internet Explorer or Firefox, to access Web documents called Web pages that are linked to each other via hyperlinks. Web documents also contain graphics, sounds, text and video.The Web is just one of the ways that information can be disseminated over the Internet. The Internet, not the Web, is also used for e-mail, which relies on SMTP, Usenet news groups, instant messaging and FTP. So the Web is just a portion of the Internet, albeit a large portion, but the two terms are not synonymous and should not be confused.As for the Industrial Revolution, you are correct, it did start in Great Britain, but the American Industrial Revolution revolutionized the world with major inventions which is the point. Our innovations have contributed significantly to the Intellectual Capital of the world. Here is a list per Michael Kelly of About.com of some of the top American inventors.1. Thomas EdisonThomas Edison and his workshop patented 1,093 inventions. Included in this were the phonograph, the incandescent light bulb, and the motion picture. He was the most famous inventor of his time and his inventions had a huge impact on America’s growth and history.2. Samuel F. B. MorseSamuel Morse invented the telegraph which greatly increased the ability of information to move from one location to another. Along with the creation of the telegraph, he invented morse code which is still learned and used today.3. Alexander Graham BellAlexander Graham Bell invented the telephone in 1876. This invention allowed communication to extend to individuals. Before the telephone businesses had to rely on the telegraph.4. Elias Howe/Isaac SingerElias Hower and Isaac Singer both were involved in the invention of the sewing machine. This revolutionized the garment industry and made the Singer corporation one of the first modern industries.5. Cyrus McCormickCyrus McCormick invented the mechanical reaper which made the harvesting of grain more efficient and faster. This helped farmers have more time to devote to other chores.6. George EastmanGeorge Eastman invented the Kodak camera. This inexpensive box camera allowed individual to take black and white pictures to preserve their memories and historical events.7. Charles GoodyearCharles Goodyear invented vulcanized rubber. This technique allowed rubber to have many more uses due to its ability to stand up to bad weather. Interestingly, many believe the technique was found by mistake. Rubber became important in industry as it could withstand large amounts of pressure.8. Nikola TeslaNikola Tesla invented many important items including fluorescent lighting and the alternating current (AC) electrical power system. He also is credited with inventing the radio. The Tesla Coil is used in many items today including the modern radio and television.9. George WestinghouseGeorge Westinghouse held the patent to many important inventions. Two of his most important inventions were the transformer which allowed electricity to be sent over long distances and the air brake. The latter invention allowed conductors to have the ability to stop a train. Previous to the invention, each car had its own brakeman who manually put on the brakes for that car.10. Dr. Richard GatlingDr. Richard Gatling invented a rudimentary machine gun that was used to a limited degree by the Union in the Civil War. However, they were used extensively in the Spanish-American War.I will also add :11. Henry FordHenry Ford created the modern day assembly line, which revolutionized productivity at the time.So the point is “Thinking Something is Possible”, is the first step. If you just say it is not possible, or are just negative, well then you truly have no chance at all. Americans are innovative. We just need to encourage it with fiscal, monetary and social policy in America. Currently our most encouraged line of work seems to be the legal profession.

  2. DF   October 23, 2008 at 1:45 am

    for your information, on the 4 ways out of the debt1 is not possible. THe debt is simply tooo large2 is started, leads to debt deflation, favors lenders.4 is not possible. The debt is simply too large. Right now governments are borrowing to buy the financial assets. THose lending are the chinese and oil exporters. With their surplus vaning away they won t lend long. Besides that does not solve the problem anyway it just postpones it. Socialize the debt is the path we ve already taken with the subprimes.Finally when government helps finance, it helps the wealthy pushers … Not exactly a just action.So it leaves only 3 as the solution. Inflate the debt away is1 very hard in deflationary times2 very hard for the lenders and asset holders to accept.3 restores government margins of action, finaly the government ends up as the only money printer and is able to fund any project of his. This restores democracy.Let me say another last thing. These last 30 years, what we seen is not a fall in “inflation”, we ve seen a fall in the price of consuming goods relative to capital goods along side a steady inflation of all prices (with consuming goods stagnant and capital goods sky rocketing”.So try to prove inflation is not the only solution, the only way to escape that other solution : war.Can t wait …

  3. DF   October 23, 2008 at 1:55 am

    In the comment abiove I mixed up 2 and 3 i of course meant 3 deflation was started and 2 inflation was the only solution. If only we could do it.And 2 is hard even if political deciders should decide for it.In europe Inflating the debt away is at present impossible. The ECB mandate opposes to it. It is not allowed to fund european or national deficits with money printing. Hence Europe can not act.In the USA, the problem is the dollar value and the US dependancy on foreign capital. Bernanke may wish to inflate debt away, but can he do so without raising HUGE anger from the US foreign lenders (China, the gulf, russia …). Right now the dollar is still overvalued, but i doubt those lending to the US are willing to accept it. They may force the USA to keep an overvalued currency for long, including through high interest rates. The US is now in the situation of the UK in the thirties, it needs to defend the status of its currency and face a choice : keep the currency destroy its economy or lose the international status of its currency.So inflation must come from asia, problem they are the one facing the biggest overinvestment case. There s not many roads you can build in china, they would need to really send cash to the country side.So technically printing will be hard. Politically it will be even harder, the finance lobby is strong.If Europe manages to reform the ECB, then something may be done.

  4. Guest   October 23, 2008 at 3:17 am

    The Founding Fathers did not call for the existance of the private Federal Reserve Bank.The private Federal Reserve Bank kept interest rates articially low for too long that sustained the bubble that has now imploded.

  5. Guest   October 23, 2008 at 5:35 am

    As some economist says, and as keynes have said long ago, the problem is that if growth is not distributed to the mass through salaries increase, but captured by asset owners, then one day or later, later with credit, the mass cannot buy, thus the asset owners lose their assets.what is explained here is only one consequence of this problem, when credit is used to circumvent this “public governance” failure.like if 1930, the todays problems have it’s roots from the break of the distribution machine that was well working until the 80s (Reagan era according to some economist).officially 29 crisis is due to overproduction, but some people says that it is a shortsighted vision. there has been overproduction only because there was underconsumption, because inequalities in the economy have exploded, preventing people to consume.Today inequalities have exploded even worse, with median revenue quite stable, and top 1% revenue exploding.the only way to keep the economic machine working was thus to allow credit. until someone get frightened (lender or debtor) et break the debt bubble in a debt-deflation.Maybe the problem seems unsolvable because it is not set to it’s roots.The world is a production machine.money as cash credit and trust is an oil, that if missing lock every thing.but the growth is physical, linked to work and infrastructure, and thus to the physical efficiency of mens and science. economics just manage sharing and allocation of work and goods.when the economics prevent optimal allocation of means to optimize the efficiency of producing agents, like preventing good health system, promoting unproductive allocation of work (zero-sum games like: advertising, war, competition, law disputes, games like finance) instead of productive (building of goods, research of knowledge or technics to increase efficiency). Of course competition might be useful in forcing people to chalenge themselves, beeing a positive sum game, but too much effort to compete is just a zero-sum game, a weaponry race.if one day, like for weaponry races, antic champion fights, or campaign cost, we regulate/limit the cost of zero-sum games activity (ads,attorneys,finance,war), we might, we can make the global machine more efficient.I agree that it is hard, and opposite to US “laisser-faire”. anyway if Europe is/was more used with such limitation of weaponry race it is because we have a millennial experience of what is living in a limited space&resources with many neighbors. We don’t live in a pioneer space but in a crowded place, like todays globalized world.another easier system is to increase the efficiency of the machine.One could be to reallocate resources so that we take care of the engine and the fuel.first of all, taking care of the health of people. Universal health coverage is thus a need for an economic engine. Other needs, like rest, feeling of fainess is also essentiel to have an efficient workforce fueling the machine.Another is an education system which is efficient, meaning not dependent on the family of community wealth, so we don’t miss some talents because of bad luck. It is essentiel to increase the productivity of workforce, and research.Another is an infrastructure system (transportation & alike) which is maintained in good state, not depending on the wealth of the community, but on the needs. When you make business in 3rd World country you realize how it is “cool” to have good road, good water, good electricity, good security, everywhere. (an office in Bangalore cost as much as on in Paris champs-Elysée, if you count facilities).Another is a system of “short/long-term swap” by the government, swapping the short term interest of business (quick and dirty) with the long term interest of the nation (long term efficiency)… I use this funny financial image to simply explain the usefulness of incentive politic, promoting good things, like energetic efficiencies, environment protection, modernization… if government propose to pay productive modernization in exchange to long term part of the growth, it can be interesting for short-termed business, on and long term interest.A particular case if the “research”, which without such a “swap” might seems unproductive at short term.if the world attack it’s structural inefficiencies, I’m sure that lenders will be happy to invest in a soon very efficient machine.However if no change is planned, nobody will be confident in the ability to pay the debt.otherwise US can still try to put more lubricant in a broken engine.finance is like the flow of oil, gasoline, electricity in an engine. but basically it is the engine (infrastructure) and gasoline (workers) who does the job. finance can only decide if the engine stall or not.

  6. Dick Brass   October 24, 2008 at 7:30 am

    The really scary part is that we are only on Strike One of this disaster — massive capital destruction. Strike Two comes next: massive unemployment. Strike Three follows shortly thereafter: anger & panic, violence and political turmoil which, if we are lucky again, will culminate in another Roosevelt. And if we are not, then in our own Hitler.Folks interested in a one-book review of how this unfolded globally last time round are strongly urged to read Piers Brendon’s “The Dark Valley,” a wonderfully written walk through the 30s.His analysis is simple and compelling. Various bubbles and market crashes in the 20s and early 30s (commodities and farm products, exports and manufactures, not just stocks) destroyed a big chunk of global capital. Industrial contraction, foreclosure and massive layoffs were the inevitable result. The joblessness, poverty and growing disorder could not be managed by any of the world’s existing regimes and their economic tools. And this led to political revolutions all over the world, many of them establishing ruthless tyrant Father figures who promised to end the misery. Instead, these murderous frauds marched their stunned and cowed peoples off to deadliest war in history.Brendon is the Keeper (actual title) of the Churchill Archives and knows the territory well. You may be depressed by the many unsettling parallels, but at least you will be forewarned.When I travel to a place I’ve never been, I always like to have a guide book.

  7. Sean   October 24, 2008 at 7:55 am

    This post before mine by “Guest” is one of the most intelligent I’ve read in the past three years. Unfortunately, the goal isn’t production. This isn’t your father’s industrial economy. This is a post modern freak show where 95% of the value of any product or service is the ethereal ‘brand’ and all of the imaginary friends, status, and status that come with it.I don’t see how to return to an age where products and services are about what human beings naturally or culturally desire. Desire itself has become the ultimate focus of all post modern activity because the natural demand for goods was not sufficient to enable production to continually increase.And not only that, studies show that most people are more concerned with relative wealth than absolute wealth. This isn’t about whether people have a washer and dryer and microwave and big TV. This is about whether they have one and their neighbor doesn’t. If their neighbor does, then they are “commoners” and need to distinguish themselves by some new and more extravagant consumption.There is no answer to this situation because there is no natural order to return to. We’ve become unthethered from our own history into a hyper-isolated imaginary world of models modeling the life that we all think we’re living, but which in fact does not exist.

    • Anonymous   October 24, 2008 at 4:02 pm

      I agree with most of this post, but not this: ‘There is no natural order to return to.’Be patient and tap into your local community. Get a personal or community garden going. Start to barter or exchange for silver.

  8. denny1   October 24, 2008 at 9:23 am

    it’s going to be okay:)’americans always do the right thing,after they try everything else’,churchill.

  9. larry   October 24, 2008 at 11:09 am

    When we look at the fix we are in, we see that the greedy bankers have been the enablers; just like drug pushers encouraging the junkies (crazed consummers) to step up and get their fix (unlimited credit). Then the bankers have even been so greedy as to invent shadow banking (unregulated) products that only serve the purpose of raking in huge fees and duping the unwary buyers into thinking they are purchasing something of value.The bubble has been growing steadily for a long time. Now the credit bubble has burst.Is there any way to contain or even slow this massive leaking bubble?If I had to try to address this; I would first look at the enablers (the greedy bankers). The only sure way to stop their greedy practices is to nationalize all the banking and replace the managers with responsible honest people who are truly concerned about their customers. Then prudent conservative monetary policies could be implemented that just might stop the free fall we are about to experience.

  10. Guest   October 27, 2008 at 12:11 pm

    “This isn’t your father’s industrial economy. This is a post modern freak show where 95% of the value of any product or service is the ethereal ‘brand’ and all of the imaginary friends, status, and status that come with it.”You are right, that my vision of economy here was “a la papa”. however it can be translated in term of immaterial products, of services, but about “useful” products or services. like food or washing machine, music, telecommunication for pleasure, travel for pleasure, are “productions”… anyway, travel for work, telecom for work, product just for appearance are not product but costs…so, maybe another idea to save the economy from the big crunch in progress, is to reduce useless/forced consumption, replacing them by new intelligent way…remote working, health preventive programs, energy efficient cars houses or power plants, fight against superficiality (like in the 60-70s with the bitnick, before the money era), conflict solving, peace…I don’t believe in negative growth, but a japan-like intensive growth is possible, increasing smartness and efficiency, and not quantity.

  11. Guest   November 10, 2008 at 7:23 pm

    Ufa!!!