Writing for the Washington Independent, economist James Galbraith asserts that the United States has reached the end of its economic rope, so to speak. The future looks bleak since past practices have not worked.
And Tuesday's cut in interest rates to zero won't work either. We are in a full-fledged debt deflation, a credit collapse. It is not just an unwillingness to lend. It is also an unwillingness to borrow, and a collapse of the collateral — of home values and secure incomes — which people need in order to borrow. This is a failure at the very heart of the system, and if left untended it could both continue spiraling downward and go on for many years.
This is not a shock, like oil prices hikes or high interest rates, to a healthy system. It is not just worse than previous recessions. It's qualitatively different. There is no source of growth in sight. Consumption and investment are being hit hard. And with the flight to the dollar, exports, which have been the one bright spot this past year, are set to suffer a sharp blow. We now have to address the economic crisis, recognizing that we have just one shovel left in the shed, and that is public spending.
Some call it "stimulus," but that's a term to resist because it suggests an exercise that adds energy to a viable private economy, which will come back in a short period of time. We must not count on this. The first task is, instead, to fill the sinkholes that are everywhere opening up.
The easiest way to do this is to build on an historical experience and also the surviving institutions from the New Deal and the Great Society.
It surely must gall the market fundamentalists that the only available, feasible and generally acceptable solution to the mess they have made of it includes implementing a state-led system-wide restructuring of the American economy. Hubris here meets nemesis.
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