The fork in the road

It isn’t easy to see amid all the goings on, but there is a fork in the economic road. A third week of improving jobless claims in the US signals the very slow recovery of the world’s biggest economy. Meanwhile the spreading of the stress in European debt markets signals that the worst in that region is yet to come.

The world is suffering two different macro crises. A private debt disaster hit countries running the Anglo-Saxon model. As Hyman Minsky would have expected, the US is beginning to escape from this because its government carried sufficiently low debt that it could step in and bail the problem out with monstrous sums of public money. The US is also assisted by having a diversified economy that contains the planet’s best manufacturing firms in addition to its biggest banks (something not considered in Minsky’s ‘financial instability hypothesis’, but then he never claimed it was a complete theory). The UK, and Ireland, and Spain, are more one-dimensional and hence more stuffed. As this article makes clear in Britain’s case.

The second macro crisis is the public debt one of the Eurozone. Here the state cannot step in because its debts are the problem. Instead the state has to negotiate its way out. Which involves politics. Which is why the problem is more intractable than the private debt disaster where the solution is automatic (deleveraging, falling asset prices, misery for anyone who failed to ‘play the market’).

The major ‘negotiation’ of the public debt crisis in Europe is Italy’s, which is now in its ‘Chin Up, Let’s All Stand Together Phase’, under Mr Monti. The press today is being terribly positive. But I cannot see where a good outcome could come from. Italians are all in favour of Mr Monti because he has not yet set out clear policies. Once he does, the political parties will attack him, and allege that dark, conspiratorial forces are behind him. Without a clear roster of policies that have to be approved by a referendum, there is no practicable way forward. And no party is urging a referendum because it would involve making policy choices clear. The parties were not even willing to offer up ministers for the government. The preference is to let the ‘technocrat’ dig his own grave.

 

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