🔔 Deflationary Depression, State-Led Capitalism & Big Changes

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"[Powell] reiterated that the lags from policy are long and variable. This is a very difficult thing to internalize no matter how many times we repeat that, it's very difficult to believe that that the policy does not affect inflation right away. "

"And right away means the lack of actual inflationary impact is between one and two years, saying that it's one year, that's generous. Now, let's everybody...  close their eyes, take a deep breath, and really try to internalize the idea, nothing we see about inflation, and job market in 2022 has anything to do with policy in 2022.

So the policy changes in 2022 had absolutely... could not possibly in any imaginable world have any effect yet on inflation or the job market"

"So the job market that we're seeing right now is a product of economic conditions in 2021"

I think depression versus recession to me, it's not just about the depth.

I think it's just going to be longer than previous recessions, and more broad because we're having, even though as I said, I'm slightly more positive on Europe, but Europe is no matter how optimistic I can be about Europe... It's still in dire straits.

And as I mentioned earlier, I might not see a lot of problems with it.

So Europe is cutting a lot of problems, US is driving itself into the ground relentlessly. And China is kind of in trouble too. So we have three biggest regions in the world synchronously going into kind of recessionary environment.

And in the middle of happening this, as you pointed out, and as your prices are probably going to stay high, until we see dramatic shrinkage of demand so that tightening and central banks are draining out liquidity, this is a very negative situation.

And I don't know how to get out of it. I mean, over the 10 years, probably resolve it by finding alternative sources of energy, building energy infrastructure, but it's kind of like they say that which is not sustainable cannot be sustained. If there is not enough dollars to pay for energy to maintain the economy at current levels, economy will not be maintained at current levels. It's that simple.

In 1946 the Council of Economic Advisors delivered a report to President Truman warning of “a full-scale depression some time in the next one to four years.”

They wrote in a separate 1947 memo, summarizing a meeting with Truman:

We might be in some sort of recession period where we should have to be very sure of our ground as to whether recessionary forces might be in danger of getting out of hand … There is a substantial prospect which should not be overlooked that a further decline may increase the danger of a downward spiral into depression conditions.

This fear was exacerbated by the fact that exports couldn’t be immediately relied upon for growth, as two of the largest economies – Europe and Japan – sat in ruins dealing with humanitarian crises. And America itself was buried in more debt than ever before, limiting direct government stimulus.

This is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies.

In the past four decades, we have become used to the idea that our economies are guided by free markets. But we are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore.

Mind you, I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. The French would call this system «dirigiste». This is nothing new, as it was the system that prevailed from 1939 to 1979. We have just forgotten how it works, because most economists are trained in free market economics, not in history.

When I see that we are headed into a significant growth slowdown, even a recession, and bank credit is still growing. The classic definition of a banker used to be that he lends you an umbrella but would take it away at the first sight of rain.

Not this time. Banks keep lending, they even reduce their provisions for bad debt. The CFO of Commerzbank was asked about this fact in July, and she said that the government would not allow large debtors to fail. That, to me, was a transformational statement.

If you are a banker who believes in private sector credit risk, you stop lending when the economy is headed into a recession. But if you are a banker who believes in government guarantees, you keep lending.

This is happening today. Banks keep lending, and nominal GDP will keep growing. That’s why, in nominal terms, we won’t see an economic contraction.