[until the international economic system gets balanced correctly -- which in its present form has never happened.]
[Below is the second half of Martin Wolf's last column. Most of it is his take-away from Wynne Godley's latest paper, which is at http://www.levy.org/pubs/sa_dec_08.pdf]
http://www.ft.com/cms/s/0/4f5c5ba2-dc22-11dd-b07e-000077b07658.html
What has happened to US private spending follows from the collapse in borrowing: between the third quarter of 2007 and the third quarter of 2008 net lending to the US private sector fell by about 13 per cent of gross domestic product -- by far the steepest fall in the history of the series (see chart). With borrowing out of the picture, private net saving -- the difference between income and expenditure -- is likely to remain positive for years, as households pay down debt, willingly or not.
Given the persistent structural current account deficit, how large does the fiscal deficit need to be to balance the economy at something close to full employment? Assuming, for the moment, that the private sector runs a financial surplus of 6 per cent of GDP and the structural current account deficit is 4 per cent of GDP, the fiscal deficit must be 10 per cent of GDP, indefinitely.
And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (E570bn, £520bn) or 5.3 per cent of GDP is not enough. The authors argue that "even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years".
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened -- in the 1930s -- the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past -- above all, nationalism -- will return. Achievements of decades may collapse almost overnight.
Yet we have a golden opportunity to turn away from such a course. We know better now.
<end excerpt>
What makes that last sentence even more ironic is that the first half of the article leans heavily on the Reinhart and Rogoff, who famously warn (at least famous to those of us who read Doug, who reads them) that "we should not flatter ourselves that we know better than our predecessors."
And if you give that reading to the last line, this might be the one of the most devastating critiques of conventional economics to come from inside the court. Wolf basically feels we're fucked until the international economy gets properly balanced -- something that has never been accomplished since Bretton Woods fell apart, and which we have no clear idea how to accomplish.
Michael