Fetters of the mind blind us so that we cannot see a solution to this crisis

We know so little.  This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories.  In the realm of public policy that is nowhere more salient than economics.  Which brings us to what might be the primary similarity between our situation today and the Great Depression.

Contents

  1. History
  2. That is was; what about now?
  3. Afterword and for more information

History

Back then policy makers were bound by what economist Barry Eichengreen called “golden fetters.”  For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard.  That is, going off the gold standard was a necessary (not sufficient) prerequisite for recovery.  They did so fearfully, not knowing what lay beyond this step into the unknown — under the force of events.

“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.” — Ben Bernanke, Essays on the Great Depression (2005)

“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy – even in the face of total catastrophe.” — Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009 ……….”E&T” refers to ”The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997

What was mysterious to them, we can see this with the clarity of hindsight.  As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009:

gold.png?w=717&h=469

Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.

What about now?

In 1930 mainstream economists were confident they knew what to do.  Now we know that most were wrong.    If this were 1930, today’s economists would know exactly what to do.  But that was then; this is now.  The world has changed since then.  Some share the confidence of their predecessor in 1930.

{W}e know what to do and how to do it to keep the world economy out of a depression. — Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009

Our leaders have implemented the conventional remedies.  Over the next 6 – 9 months we will see the results (lags are long in complex modern economies).  They seek to restore the status quo ante-Depression, the post-WWII financial regime.  Perhaps they will be successful.

Or — might there be an equivalent set of cognitive fetters, so that we cannot see the systemic factor that must be changed to end the downturn?

Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.

I believe there is an obvious candidate, one similar to that of the 1930 gold standard:  the US dollar as the reserve currency.  This is a foundational element of the post-WWII world.  Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value.  But that era is ending.  As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegmony:  monetary and militarily.

We do not want to let go that role.  Nor does most of the world want us to do so.  Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending.  The last such transition was 1914 – 1945; nobody enjoyed it.

The clock is running on the “developed world” — Japan, Europe, and America.  All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads.  A new world looms ahead.  We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.

Afterword — and an important note about comments to this post

This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

Some posts about the transition to a new world:

  1. Prof Nouriel Roubini describes “The Decline of the American Empire”, 18 August 2008
  2. “A shattering moment in America’s fall from power”, 19 November 2008
  3. “End of Empire” by David Roche, 29 November 2008
  4. The transition between Imperial reigns: what will it mean for America?, 16 December 2008
  5. This financial crisis is the transition to a new world; like birth, it is painful, 11 February 2009
  6. To understand the Imperial Unconscious, Tom provides the Dictionary of American Empire-Speak, 6 March 2009
  7. A look at the new world – after the downturn, 19 March 2009

Originally published at Fabius Maximus and reproduced here with the author’s permission.

2 Responses to "Fetters of the mind blind us so that we cannot see a solution to this crisis"

  1. George Harter   April 4, 2009 at 1:56 am

    I realize “Decline of the American Empire” is now a mantra in some circles, as well “Death of the Dollar as Reserve Currency”. This is really simply a fond wish on the part of some people(we should be so lucky).SE ASIA will not submit to Chinese hegemony, nor will India, or Japan, or even Korea. Currency swaps are a small issue, being in charge of a reserve currency???Anyhow, RC status forces an upward valuation of the Yuan. The Chinese will let that happen???They are already struggling with competition and severe quality issues.India? The Rupee-Yen basket? The Yuan-Yen-Bolivar-SDR basket?? Of course not. The Chinese don’t want the responsibility of having to castigate themselves! What about the world DM?? Uh, how are the Euro banks actually doing?? Under the make up, rotting corpses. Will LULU save the world economy? Putin??By default the crippled dollar will continue on, American Empire is also doomed to continue, I CAN SEE THE ALTERNATIVES-the IMF???China, the biggest potential anything is not simply a big bag of money. Westerners AS A GROUP, refuse to acknowledge the political situation in China. When Chinese governance begins to crumble is it expected there will be no effects on the economy??? Economies are NOT isolated from their Political surroundings.Who will be the new Emporer??? A very weak and old one, the USA. We are stuck with the role. But, yes, we could unilaterally change the Dollar to a Non-Reserve Status. The effects would be interesting to witness.George HarterBaghdadontheHudson, USA

  2. John Day   April 4, 2009 at 4:34 pm

    The fundamental problems leading to the present collapse of the global financial system are those inherent in centralized creation of debt based currency with repayment at interest.Centralized creation of currency,as opposed to something like grain receipts, spent by a farmer into a local economy, inherently redistribute wealth to the elites,and impoverish those who actually create goods and perform services, weakening the “real economy”.The creation of currency gives the advantage to the creator, in this case governments and central banks. This is distorting, especially when banks extract such high percentages from an economy, as we have seen since the 1970s, with acceleration in the 1990s and 2000s.The abuse of the powers of currency origination creates massive speculative bubbles, which contain the imaginary capital for awhile,until they burst. In the scramble for real goods and services, the productive citizens suddenly have their holdings diluted as the bubble bursts and the remaining currency seeks any repository of actual value.The creation of currency through indebtedness at compound interest compounds the problem, by assuring that the currency is inherently unstable, in a manner analogous to running faster and faster downhill. There is a phase where debt and interest are repayable by some (never all), followed by a phase where interest on debt is sustainable, followed by a phase where debt is incurred to sustain interest payments, followed by a collapse and massive debt repudiation, in any form.We are now at the transition into the final phase.All promisary currency will be in disrepute following this collapse. Receipts for deposits in a grain warehouse, or copper ore on a ship, or barrels of light sweet crude, are of fundamental value, and a system of electronic multi-way barter can be envisioned. That is kind of clumsy, by any measure, but may serve for such commodities.Local currencies, with their inherent local benefits, and absence from parasitism of wealth by central entities, arise in times of economic collapse. These are limited in application. They are soon outlawed by central governments.Gold does not expand or contract well, to fit an economy, but it has the faith of all parties. Silver supply is somewhat more elastic, and abundant, and would also support faith, where the failure of faith was paramount (post collapse).A basket of commodities could be envisioned, but commodity based currencies always seek the worst quality goods and lose faith. The commodities would have to things like copper,light-sweet-crude, grade A wheat, low sulfer coal, pig iron, etc.Certification of such a basket would be complex, subject to politics and parasitism and difficult to initiate in the face of global financial collapse.Silver would be easier to start.the start will be the difficult part.The Pope, with whom I often disagree, has recently lauded Islamic financial principles, which tie risk and reward to each project, the ultimate “skin in the game”. The lack of compound interest, but the ability to profit from wise investment, make this viable in the long term,including in a steady state economy.There will never be the big profits from bubbles, but those correspond to eviscerating hidden losses to producers in the real economy.As we seek sustainable economy, we need a sustainable creation of currency, which preserves value in the locus where it is created, and which is resistant to debasement.The best I can come up with is Islamic banking and silver.As to the solution to the current crisis,it is honesty, and the need to meet the food,shelter, safety, medical and educational needs of all people, in a humane and humanly meaningful format, before the luxuries of the elites.The arguments supporting the sanctity of property collapse in the face of the fraudulent means which have concentrated titular ownership of property in the hands of so few. Things are allowed as “property” which should never be allowed, such as the rights to groundwater, or mountaintop mining, things which destroy a resource and a habitat for the future.The redistribution of resources for the common good is essential to our group survival. We need to address this in an orderly fashion, before it becomes the French or Russian Revolution.This may involve resurrecting the corpse of representative democracy, from the Lenin’s Tomb, where it lays in state, with the false appearance of life.Good luck, Democracy!