Go read Stirling today:
Many people think back to 1929. That is the wrong model. Instead, it is best to see the present period as an analogy to the series of panics that occurred during the classical gold standard, where there was a tension between the monetary and capital base. Gold was obtained through colonial conquest, and technological improvement in extraction. This made it related to the growth of the economy in that resources and technology to together were a good proxy for an over all economy. However the coming of the petroleum age did a number of things. One is it decoupled mineral wealth from energy wealth, the other is that it decoupled resources from their traditional qualities. Petroleum changed the game too dramatically. By 1929, the coal economy was ready to give out, and the attempts to force the world back on to rock money were doomed to failure.
However, we are not there yet, there isn’t a clearly superior new economy ready to leap and take the place of the old one. Instead, we have pieces of it which are clearly distorting old values and valuations, but cannot properly be measured in our current base of oil-for-paper economics. Computers create happiness that is not measured in how much oil they convert into homes, but they don’t monetize easily either. This means it is hard for money based on monetizing oil-to-homes-to-paper to measure the real value they create. We keep over, and under, estimating what the new economy can do, because it won’t do the one thing that investors want it to do, and that is make the old petroleum economy more profitable. There’s no more profit to be had, only the ability to downshift older working zones in favor of newer ones.
This means that, as with the late years of the 19th century and early years of the 20th century, stock valuations, measured in absolute terms, are going to remain relatively flat, though with very wide swings. The petroleum and second wave electrical economy didn’t save the coal economy, but destroyed it with the same brute efficiency that German dive bombers and tanks would dismantle the Polish army in 1939.
This means that this crash is not the end, nor even the beginning of the end, of the present financial system. Instead what will be imposed is a massive bailout that will hobble US fiscal policy – the the delight of reactionaries who will let 8 years of discipline pass in the hopes that when there are goodies to be passed out they will take power and plunder the treasury to the tune of trillions of dollars more. It is only when that next plundering occurs, and the US economy does keel over from it, that we will really reach the end of American’s tether on this. Stupidity got us into the mess, and Americans are lining up to support yet more stupidity.
What should be done? Immediate, dramatic and forceful restructuring of the tax and entitlement systems, the banking system, and the energy system. Only by changing the incentives away from flipping houses, will we see a dramatic shift away from consumption and towards manufacturing. Historically this has taken a massive collapse in equities and a war.
Nothing seems to have altered that….
The ultimate failure of Bernanke is that he hasn’t read his own papers carefully enough, and he has forgotten that economies can be guided by money supply, but not remade. A multi-trillion dollar world economy can be rev’ed on go pills, but while the fed can print money, it can’t print oil.