The Economy

[kandrathe]

This isn't about oil. Oil is as cheap as it's been in quite some time. Things are not yet recovering. (Actually, if we take your idea about an "oil standard" seriously, the US debt (denominated in oil) just about halved during this crisis. Cause for celebration, no?)

Look up the Bretton-woods gold-dollar exchange, and what happened when Nixon shut down the gold window refusing to pay $300 million as ounces of gold. The world moved to use "petrodollars" as a medium of exchange. Every recession since the 1970's was preceded by a severe spike in oil prices.

Also, check out the price graphs for *all* commodities. This is what I would call an economic crash, not just a normal correction on wild speculation of the crude oil market.

This is about what is better in the short run, what is better in the long run, and whether those things are the same. The updated, monetarily-aware pseudo-Keynes (Krugman, really) would argue that, given the maxing out of monetary policy to comparatively little effect, the correct answer is fiscal stimulus.

Ok, here is what I would do if I were king of America. Help the people. Forget about the failing companies, and let markets, analysts, bankers, and businesses recalculate, go bankrupt, and figure out how to recover whatever *real* capital they have left. Ok, so how do we help the people? First, let's go to the lowest level of "Maslow's pyramid of need", where unemployed people are concerned about losing their homes, feeding/clothing their families, and having access to important services like health and dental care. Here is where you focus your *damn* stimulus. Then, if you haven't entirely bankrupted the nation, work with the SBA to provide venture capital and low interest loans to small businesses to help encourage new business growth. Left the dinosaurs go extinct, and let a new wave of innovation take over the capital, and labor that they shed in their death throes.

Arguing about malinvestment and inflation and the whole lot is missing the point: people are scared, and until they see a reason to have courage and invest rather than withdraw, banks as much as individuals, the economy is going to stay depressed. An exclusively market-driven solution could be years or decades away. Yes, if spending today is misplaced, that will be inefficient for tomorrow. Yes, debts ran up today will have to be paid off tomorrow. But inaction today results in inefficiencies as well: labour and capital that could be profitably employed is sitting idle for want of investment funds that are not available, since banks and savers alike are fearful.

I agree with this whole-heartedly, but I don't see any leadership in this direction from the POTUS or US Congress.

Government is the only entity with the credit and the power to break the fear, and help things gear up again. This will cause problems for the future. There is no free lunch. But those problems, at least in the Krugman analysis, are dwarfed by the immediate problems of how to get the economy out of the deflationary trap. Fix the immediate problems. Then when things are no longer spiraling out of control, regulate monetary policy and the financial sector so that they cannot fail in the same way again. Then start paying down the debt. Trying to do any of this in reverse order will inhibit recovery and cost the economy in the long term.

You (or Krugman) is right in that we cannot do anything to the debt until we do something about failing revenues, and we cannot use taxation to shore up revenues when staring at a crisis of credit (debt), and business losses and bankruptcies. I don't have faith in the government to make good decisions on spending more borrowed money.

To me, its like a gambling addict who has run up a $100 grand tab, which is too big for him to pay for, asking to borrow another $10 grand to pull himself out of the hole. If it was the government (partly at least) that got us into this mess, why do we think it will be government who gets us out of it? I don't advocate letting Vito break our knee caps, but perhaps we need at least a round table of the worlds best and brightest economists (which would not include Nancy Pelosi, or Harry Reid, the authors of the last stimulus bill) to come together and form a rough consensus on the best course of action. Keep the conservative/progressive politics at home on this one. Let's go save some lives.