Fear is spreading on world financial markets that the United States is now staring at a double dip recession or a slide into depression. The Keynesian economists who dominate many western governments, and who believe you can avoid or soften a recession by pumping more money into the economy, are running out of stimulus cash as well as political will, in the face of disastrous levels of debt. By one estimate, U.S. federal debt is now at more than 96 percent of GDP.
Despite huge amounts of seemingly wasted stimulus money, the economic news remains bleak on almost all fronts. The S&P 500 fell to its lowest level in eight months today. More importantly, it dropped below its 2010 low of 1,040.78 during the session, which could spark a stampede for the exits on Wall Street. "Everybody is talking about 1,040. That it is the do-all, end-all, blow it up, end of the world, blood on the streets level, the market crashes,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, to Reuters.
The Chicago Board Options Exchange's Volatility Index has jumped some 16 percent. The VIX is known as the market's fear gauge which signals that traders are expecting more drops in stocks. May monthly jobs numbers were dismal. Consumer confidence is falling, along with commodity prices and treasury rates. Paul Zemsky at ING Investment Management warns that if Friday’s June jobs report is bad, "it's really 'Look out below.'"
Depressions are awful. But left to themselves, they can be relatively brief, efficient episodes in the business cycle, in which the debt, dry rot and fluff are cleaned out of an economy and vigorous economic growth can then resume. Without the kind of government meddling by Franklin Roosevelt in the 1930’s and again today under Presidents Bush and Obama, free market economies can recover from depressions fairly quickly. But depressions are toxic to political ambitions. So both political parties have been seduced by Keynesianism as a way to try to manipulate the business cycle and avoid the rough patches.
But Keynesian stimulus spending has reached the end of the road. As the Wall Street Journal reports, “The Europeans have had enough and want to swear off the sauce, while the Obama Administration wants to keep running a bar tab.”
The Keynesian economist Paul Krugman, renowned as much for his wrong ideas as for his Nobel Prize, now says we have entered the early stages of "The Third Depression,” because politicians have lost the courage to keep stimulating the economy with deficit spending.
The Depression of 1920?
Few have heard of the Depression of 1920 because it’s NOT a morality play about the wonders of government intervention, but about the wonders of the free market. As Thomas E. Woods of the Mises Institute tells us,
“The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. But Instead of "fiscal stimulus," President Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.”
The Depression of 1920 was over by August of the next year. What followed was the incredible growth of the 1920s.
But when Presidents Bush and Obama tried to spend their way out of a feared depression, they, like Roosevelt, turned what might have been just a bad year into what looks to be a miserable decade. And we may see the bottom fall out in the next few days.