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September 4, 2012 at 2:58 pm #5342skipbreakfastParticipant
Or is this economist missing something?
He recognizes we are teetering on a deflationary death spiral. But sees more than one possibility unfolding from this point, as follows:
1) the aforementioned deflationary depression;
2) a Japanese scenario in which the government drip-feeds trillion dollar stimulus for 5 to 10 years, keeping America on life-support…but resulting in an un-repayable deficit a decade later and the aforementioned (but delayed) deflationary depression (nevertheless, he adds, postponing certain death until later is better than certain death today); or
3) the US government learns from the Japanese scenario how spending on “bridges to nowhere” didn’t solve the problem, and instead massive government spending is diverted into breakthrough technologies, in particular renewable energy like solar, thereby becoming a world leader in such technologies and securing another century of US economic dominance.
The problems I spotted with Duncan’s three-pronged outlook are (unfortunately) within the theoretically preferable option 2 and option 3.
In option 2, Duncan himself points out that Japan is going to implode sooner than later, with its current debts equal to 240% of GDP. And so I wonder how on earth the U.S. could continue to fund the multi-trillion dollar life-support model he pre-supposed can last for 5 to 10 years.
I would expect that a Japanese implosion would quickly scuttle such a plan, as the will to follow in Japan’s footsteps would immediately be shaken–not to mention that a Japanese implosion would be so brutally devastating on world bond markets that I doubt the U.S. could actually fund such a plan.
Japan has had the benefit of a quarter century of American and European credit-backed “growth”. The US would have no such world to borrow from. And so, I can’t see the current drip-feed model lasting long enough to emulate Japan in any real respect.
Can the U.S. just print at will in such a post-Japanese-default scenario without losing the total faith of the bond market? I don’t believe so. So, this route quickly becomes politically and economically untenable.
Finally, his option 3 sounds far too much like spending trillions hoping to learn magic powers. Yes, new technologies will be discovered, and we’ll need them. But they won’t be sufficient to replace existing but too-expensive technologies (like oil). At least not in nearly enough time.
I’m much more persuaded by James Kunstler’s arguments in Too Much Magic, wherein he posits that the time for hoping for miracles like flying cars is over, and the time to begin preparing for the long emergency has begun. And so Duncan’s option 3 ends up being a risky quadrillion dollar bet that isn’t necessarily all that different than option 2’s bridges to nowhere. Remember the ethanol revolution? Wonder what that cost us!
Which sends me right back to square one and the dreaded deflationary depression.
Would love to know what anyone else thinks are the merits or weaknesses in Duncan’s outlook.
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