Predicting depression is one of the hardest chores a financial analyst can ever undertake. People have an obvious economic incentive to avoid getting into a state of general impoverishment, and governments have an equally obvious incentive not to be tarred and feathered in the history books for allowing it. This incentive is so powerful that any popular book explaining the cause of a future depression, no matter how tightly reasoned and realistic it is, often euchres itself out as a predicative tool. Forewarnings are always forearmings, at least to some. Thus, a successful prediction of a depression is, to the financial analyst, as much a feather in the cap as an undefeated record is to a chess champion. People who achieve either are not just kudoed, but practically worshipped for doing so.
There is an unusual split in depression analysis, one whose sides play off each other. The mainstream theories focus upon what could trigger a depression: the simplest ones are all variants of confidence theory. The more sophisticated ones do attempt a causal analysis, but wind up becoming trigger theories by concluding that a government agency, or the public, brought ruin to paradise through certain mistakes. What all trigger theories have in common is the assumption that everything was fine in the pre-depression economy, or would have been if those mistakes had not been prefaced by immediately previous "irrationality."
A deeper analysis rejects that assumption, and substitutes a more long-range causal analysis for the short-termism in all mainstream explanations. According to causal theories, depressions expose a structural weakness in an economy that appears fine, but isn’t. The Austrian theory, as explained in Murray N. Rothbard’s America’s Great Depression, singles out the instability that is created by central bank creation of business credit out of thin air. Once it permeates the economy, thanks to the fungibility of credit, the stage for future decline is set. A depression is caused by the general realization that the supposed real wealth backing some of the credit simply isn’t there. Depression results from a large number of malinvestments, ones that are the result of central bank interference with the credit market, being exposed as such, quickly.
Forecasts of depression based upon the inflation-of-business-credit theory are apt to go wrong because government has an obvious reason to keep the credit bubble going. Keeping the show going keeps the governed from getting angry at the government. Letting the credit bubble get out of hand will induce anger of a different sort, even if the blame is sometimes displaceable onto parts of the private sector. Governments, therefore, also have the incentive to partially deflate the credit bubble from time to time, usually in response to general price rises becoming unacceptably rapid. (This rise in the price level results from the proceeds of the thin-air credit being spent.) The mainstream synthesis in economics is based squarely upon this call-it-as-you-see-it approach. So is the mainstream conclusion that the needed juggling act can be kept up forever if mistakes are avoided. Earlier forecasts of depression that have been wrong, or mistimed, are held up as evidence that causal theories, including the Austrian one itself, are wrong. The causalists respond that governments have simply pulled out new tricks to keep the bobble game going.
There is a hint of sense in the confidence theory. Credit is not foisted upon people; they have to agree to borrow. If enough businesses decide, voluntarily, that they have borrowed more than enough and it is time for them to focus on repayment, then further central bank credit inflation will result in the central bank "pushing on a string." Unfortunately, this glimmer of sense is obscured by attempts to blame any businesses that (possibly have to) retrench, for doing so. The end result is that businesspeople are held to blame for showing, at times, a needed prudence. The consequent restrictions on loans by banks are an effect of such revivification of prudence, as they cannot adjust their loan policies in defiance of their typical customer, the borrower.
It should always be remembered that mechanistic economic theories presuppose that economic agents act like robots. These theories make a kind of sense in times when sticking to habit is economically rational. When a wide-scale change in habits becomes economically rational, though, those previously accurate-enough mechanistic theories turn vacuous.
The collapse of the mainstream, with the consequent pinning of blame for depressions where it belongs by citizens, is a frightening prospect to its members. So, both they and the government itself have a large incentive to find, and reach for, any funds needed to keep the credit bubble from being punctured. Since the continuance of the business cycle depends upon habitual borrowing, with the only influencer of the amount of funds borrowed being the price of credit (the interest rate), government has a definite interest in ensuring both an ample supply of credit and a vibrant credit market. It is true that the much-forecasted Greater Depression in the 1990s never took place. What should be examined is why.
To put it bluntly, the American economy was saved from depression in the 1990s by its permanent trade deficit. This deficit, and the consequent accumulation of capital in foreign hands, has been diverted largely to increases in foreign holdings of U.S. securities, primarily the debt obligations of the U.S. government. This agreeableness of creditor nations, held in place by the underlying fear that refraining from this helpful rollover will trigger a trade war, is the patch job that has kept the debt-ridden U.S. economy from imploding into a deflationary depression.
This stopgap is the current reason why the forecast of depression made in an otherwise erudite and insightful book, The Great Reckoning by James Dale Davidson and William Lord Rees-Mogg, was one of the two main predictions in it that have not stood the test of subsequent events. The second was a forecast of the United States declining in power and influence. (The other predictions have fared better.) Both the continuance of U.S. prosperity and the emergence of a full-blown U.S. empire do feed off one another.
In terms of confidence, it is evident that dreams of empire are fed by this conclusion: "Every credible declinist in 1990 said we’d have a depression and all of ’em were wrong. They all were nattering ninnies; economics’ answer to the peace creeps. So why shouldn’t the great United States keep growing and growing? The guys who have any plausibility of denial have been shown up, time and time again, by our strength and our might."
If this was all there was to the case for permanent U.S. ascension, then it would be time to roll out the predictions of depression again. There is, however, a new fallback this time, one that will keep feeding the aggrandizement of the State.
The crucial difference between the past hegemony of the U.K. and the present hegemony of the United States is that the British Empire’s was creditors’ hegemony, while the U.S.’s is debtors’ hegemony. The debtor nation is the one who’s doing the fighting for the creditors.
This position, geopolitically, is much more advantageous than it seems. One of the insights in The Great Reckoning worth remembering is that debtor nations suffer less from global depression than creditor ones do: the consequent implosion of financial assets all but ensures it. If a deflationary depression should visit the world as of soon, then America’s creditor nations will suffer more than America itself. It’s plausible to assume that the creditor nations are so agreeable because they know it, or have been made aware of it. This is what has kept the U.S. from being ruined by a debt implosion: "If I fall, I’ll break my leg; if you fall with me, you’ll break your spine — and it’s quite obvious that if one falls, we all do. So we’d all better do our part when it comes to staying up."
U.S. militarism fits neatly into this precipice if it is added to the United States government "doing its part." The bargain cut seems to be this: the U.S. citizenry does the bulk of the fighting, the killing, the dying, and the consuming. The others supply the preponderance of goods and credit, in part as matriel. This kind of reciprocity keeps an increasingly unstable global economy going.
Economically, the cobbling together of this international credit tie implies that there will be no depression soon, despite the increasing debt overhang that will trigger one eventually. The U.S. Keynesian system has kept itself running through putting pennies in the fuse box, and through shifting appliances from one circuit to another; there may very well be more fuses that can be replaced in an emergency. I can think of one right off the top of my head: the U.S. government does not demand recompense from its foreign creditors for doing the world’s fighting. If a serious economic crisis erupts, it might, perhaps through the United Nations. If so, then the next fuse-box penny, usable for a crisis in a more distant future, is demanding tribute.
The economic logic of Keynesianism all-but-implies a growing U.S. empire, with this rough double conditional becoming more and more relevant to its maintenance: "if you want to pull the curtain down, then take a look at what got the curtain back up for us back in the 1940s. If it worked last time, then it’ll work the next time."
Neo-conservative arrogance is, at least evidently, becoming politically costly for the Republican Party. There is, however, a new arrogance surfacing in neo ranks, one that is more geo-economically functional than it appears: advocacy of the use of nuclear weapons in war. Rather than it being dismissable as neoconservative howls to the moon, it does have a functional logic that would solidify the growth of the U.S. "Empire of Debt." Would you dun a debtor whose gross assets include the world’s biggest nuclear arsenal, and whose creatures of state are beginning to seriously contemplate its use?…