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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