Green Shoots or Green Observers?

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Econ­o­mists have long had to endure being called “Dis­mal Sci­en­tists”, but really that’s not hard enough on them. With their pro­cliv­ity to invent trite phrases to describe com­plex issues, they deserve to be known as Dis­mal Poets as well.

The lat­est cliché off the eco­nomic jar­gon pro­duc­tion line is “Green Shoots of Recov­ery”. With gov­ern­ments hav­ing laid lib­eral amounts of fer­tiliser – in the forms of hand­outs, bud­get deficits, slashed inter­est rates and “quan­ti­ta­tive eas­ing” (another new piece of jar­gon for giv­ing good money to bad lenders in return for bad assets) – they now report signs of eco­nomic recov­ery sprout­ing like alfalfa everywhere.

At least this anal­ogy has a bet­ter foun­da­tion than pre­vi­ous favourites like “step­ping on the accel­er­a­tor” (or the brake), which implied the econ­omy was some­thing as straight­for­ward as a car. This one has hints of biol­ogy, which is a bit closer to the organic, evo­lu­tion­ary thing an econ­omy actu­ally is.

But econ­o­mists’ knowl­edge of the eco­nomic gar­den reminds me more of Chance the Gar­dener from Being There – a sim­ple­ton who those in author­ity thought was pro­foundly intel­li­gent because he answered ques­tions about com­plex issues with sim­ple analogies.

The com­plex issue being buried by this lat­est anal­ogy is “what caused the cri­sis in the first place?” The answer, as I’ve been argu­ing for years now, is that a debt-financed spec­u­la­tive bub­ble gen­er­ated illu­sory wealth as it grew, but its col­lapse has now left us with a moun­tain of pri­vate sec­tor debt.

Now that the Ponzi folly of lever­aged spec­u­la­tion on asset prices is over, debt has stopped grow­ing and the con­tri­bu­tion that grow­ing debt made to demand has dis­ap­peared. That alone is enough to cause a cri­sis: in the USA in 2006-07, pri­vate debt grew by $4 tril­lion, boost­ing aggre­gate demand in that $14 tril­lion econ­omy by over 20 per cent.

Even sta­bil­is­ing debt at its cur­rent level results in demand falling by 23 per cent in Amer­ica. And now the debt bub­ble is act­ing in reverse – reduc­ing demand as firms and fam­i­lies reduce debt, and nec­es­sar­ily spend less in the process.

The result is a plunge in demand that dri­ves unem­ploy­ment up and pro­duc­tion down. Gov­ern­ment attempts to stop this by throw­ing large amounts of pub­lic money at it can atten­u­ate the process, but they are too small to coun­ter­act it because the debt lev­els are so huge.

So while tem­po­rary salves may flow from gov­ern­ment stim­uli, the recov­er­ies such largesse have engi­neered in the past – dur­ing the reces­sions of the 80s and 90s – worked only because they restarted pri­vate debt growth.

With US pri­vate debt at 300 per cent of GDP, there is no prospect of that lend­ing tak­ing off again. So the stim­uli will slow the pain, but not stop it. The “Green Shoots” will turn brown, whither and die.

And to see them amidst all the global data itself requires dis­torted vision (wear­ing grass-coloured glasses per­haps?). As eco­nomic his­to­ri­ans Barry Eichen­green and Kevin H. O’Rourke have shown, on a whole host of indi­ca­tors to date, this cri­sis is pro­gress­ing in step with The Great Depression.

How green will neo­clas­si­cal econ­o­mists appear to be in a year’s time? Watch this space.

This was orig­i­nally pub­lished on Fri­day, June 26, 2009 as an expert com­men­tary on Peter Switzer’s relaunched blog.

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129 Responses to Green Shoots or Green Observers?

  1. Lyonwiss says:


    The “out of con­text” statement:

    offered rates recently between 3% and 6% have been to low”

    is cer­tainly not mine.

  2. scepticus says:

    lyon­wiss, I’m not try­ing to put words in your mouth. You said:

    For recent years, inter­est rates and the cost of cap­i­tal were far too low, which encour­aged “bor­row to spend”, “bor­row to invest” and “bor­row to speculate”.”

    My under­stand­ing of recent rates (at least here in the UK) for typ­i­cal mort­gages have var­ied between 3 and 6% for typ­i­cal loans. Pu what­ever fig­ures you like on what your define as ‘rates to low’, they’ll still be mas­sively higher the the real under­ly­ing neg­a­tive rates so you have not man­aged to answer my question.

  3. Lyonwiss says:


    The debt explo­sion that had occurred in recent years and sub­se­quently proved unsus­tain­able was by def­i­n­i­tion a proof that inter­est rates gen­er­ally were too low. Offi­cial bank rates or offi­cial inter­est rates and not mort­gage rates are nor­mal ref­er­ence rates for stan­dard eco­nomic discourse.

  4. scepticus says:

    Lyon­wiss, what mat­ters for a health econ­omy is not the absolute rate offered for credit but the spread between the offered rate and the under­ly­ing growth rate of the econ­omy. Do you agree with this on gen­eral principle?

    If so, given that real rates have been neg­a­tive how can you com­mend that offered rates were to low.

    If not, then pre­sum­ably you would advo­cate that credit be restricted in vol­ume and offered at a higher rate, but with the high­est of dili­gence by the lender. How­ever this kind of credit restric­tion would be defla­tion­ary, fur­ther increas­ing the real neg­a­tive rate. To which you would fur­ther restrict credit and raise rates fur­ther I presume?

    What is the end game of that?

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