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Naked Capitalism: Some form of global central planning may be necessary…

February 25, 2010 Leave a comment Go to comments

In an ironic twist to the growing realization that this crisis is far from over despite the glad-handing in Washington on having barely escaped Great Depression II, Yves Smith, of Naked Capitalism, yesterday suggested that some form of central planning – similar to the collapsed Soviet Union – may be necessary to avoid the economic calamity separately predicted by Peter Boone and Simon Johnson, and by Martin Wolf.

Smith was responding to an article in the Financial Times by Martin Wolf, The world economy has no easy way out of the mire‎, in which Wolf stated,

Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure.

By “success”, I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale.

Unhappily, the result of what I call success would probably be a still bigger financial crisis in future, while the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn, would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.

Wolf’s dismal forecast is an echo of that given by Boone and Johnson in their recent piece, The doomsday cycle:

What will happen when the next shock hits? We believe we may be nearing the stage where the answer will be – just as it was in the Great Depression – a calamitous global collapse. The root problem is that we have let a ‘doomsday cycle’ infiltrate our economic system …

In her response to these two gloomy predictions, Yves Smith, in her piece, Martin Wolf is Very Gloomy, and With Good Reason, presumes still another down leg in the crisis is in the offing and writes:

I had a little e-mail chat with Swedish Lex, who offered his take:

The implicit conclusion of what Wolf and Johnson write is that we going forward need dirigiste economies and national and regional scale of types and magnitude that we have not seen before (or at least not in a very long time). In addition, the dirigisme would have to be closely co-ordinated globally.

I agreed with his reading of their views and noted:

I don’t see how we get close coordination. I had a talk with someone in from Hong Kong today, he is quite alarmed at China’s bullheadedness, wanting what it wants and devil take everyone else.

Plus we will not get dirigisme until the hold of the banking sector is broken. It will take a bigger bust to do that.

A dirigiste regime is an economy where some form of central planning is implemented by the government to direct economic activity. It can range from loose management through monetary and fiscal policy as is done by Washington for the American economy, to the failed Soviet economy where government directed all economic activity.

Although the idea is intriguing, it raises two big problems: First, it is not clear, given the experience of the Soviet Union, that a planned economy avoids the disaster predicted by Boone, Johnson and Wolf. Obviously the SU collapsed – and we would argue this collapse stemmed from its refusal to shorten hours of work, and end its military program. But, we also think there is an argument to be made that because the Soviet economy was planned, its higher rate of sustainable growth actually accelerated the trend toward collapse.

Second, as Swedish Lex points out, any central management scheme for the global economy would need to be negotiated globally. It would probably require the United States to give up both its control of the world reserve currency, and its massive military budget. These would be non-starters. This is especially true since the US already exerts an unprecedented degree of control over the economies of other nations through its domestic fiscal and monetary policy. Greece is the most noticeable example of this influence – it is confronting the European Union with the choice of loosening its monetary policy, as the US has done, or suffering sovereign default throughout the Eurozone.

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