CuA1LR 1wO

DLRLSSLON LCONOMLCS
1he Wcr|d has been s|cW tc rea||se that We are ||v|nq th|s year |n the shadcW c| cne c| the qreatest eccnca|c catastrches c| acdern
h|stcry. uut ncW that the aan |n the street has beccae aWare c| What |s haen|nq, he, nct |ncW|nq the Why and Where|cre, |s as |u|| tc-
day c| What aay rcve excess|ve |ears as, rev|cus|y, When the trcub|e Was ||rst cca|nq cn, he Was |ac||nq |n What Wcu|d have been a
reascnab|e anx|ety. ue beq|ns tc dcubt the |uture. is he ncW aWa|en|nq |rca a |easant dreaa tc |ace the dar|ness c| |acts Or drc|nq
c|| |ntc a n|qhtaare Wh|ch W||| ass aWay
ue need nct be dcubt|u|. 1he cther Was nct a dreaa. 1h|s |s a n|qhtaare, Wh|ch W||| ass aWay W|th the acrn|nq. |cr the rescurces c|
uature and aen's dev|ces are just as |ert||e and rcduct|ve as they Were. 1he rate c| cur rcqress tcWards sc|v|nq the aater|a| rcb|eas
c| |||e |s nct |ess ra|d. we are as caab|e as be|cre c| a||crd|nq |cr every cne a h|qh standard c| |||eh|qh, i aean, ccaared W|th, say,
tWenty years aqcand W||| sccn |earn tc a||crd a standard h|qher st|||. we Were nct rev|cus|y dece|ved. uut tc-day We have |nvc|ved
curse|ves |n a cc|cssa| audd|e, hav|nq b|undered |n the ccntrc| c| a de||cate aach|ne, the Wcr||nq c| Wh|ch We dc nct understand. 1he
resu|t |s that cur css|b|||t|es c| Wea|th aay run tc Waste |cr a t|aeerhas |cr a |cnq t|ae.
1chn Maynard keynes, 1he Great s|ua c| 1930
1u| wOkDs AuOv| Were Wr|tten acre than e|qhty years aqc, as the Wcr|d Was descend|nq |ntc What Wcu|d |ater be dubbed the Great
Deress|cn. ?et, as|de |rca a |eW archa|sas c| sty|e, they ccu|d have been Wr|tten tcday. ucW, as then, We ||ve |n the shadcW c| eccnca|c
catastrche. ucW, as then, We have sudden|y beccae ccreryet ne|ther cur rescurces ncr cur |ncW|edqe have been |aa|red, sc Where
dces th|s sudden cverty ccae |rca ucW, as then, |t seeas as || cur css|b|||t|es c| Wea|th aay run tc Waste |cr a |cnq t|ae.
ucW can th|s be haen|nq Actua||y, |t's nct a aystery. we understandcr We Wcu|d understand, || sc aany Weren't re|us|nq tc ||sten
hcW these th|nqs haen. keynes rcv|ded auch c| the ana|yt|ca| |raaeWcr| needed tc aa|e sense c| deress|cns, acdern eccnca|cs can
a|sc draW cn the |ns|qhts c| h|s ccnteacrar|es 1chn u|c|s and irv|nq ||sher, |ns|qhts that have been exanded and aade acre sch|st|cated
by a nuaber c| acdern eccnca|sts.
1he centra| aessaqe c| a|| th|s Wcr| |s that th|s dcesn't have tc be haen|nq. in that saae essay keynes dec|ared that the eccncay Was
su||er|nq |rca aaqnetc trcub|e, an c|d- |ash|cned tera |cr rcb|eas W|th a car's e|ectr|ca| systea. A acre acdern and arquab|y acre
accurate ana|cqy a|qht be that We've su||ered a sc|tWare crash. ||ther Way, the c|nt |s that the rcb|ea |sn't W|th the eccnca|c enq|ne,
Wh|ch |s as cWer|u| as ever. instead, We're ta|||nq abcut What |s bas|ca||y a techn|ca| rcb|ea, a rcb|ea c| crqan|zat|cn and cccrd|nat|cna
cc|cssa| audd|e, as keynes ut |t. sc|ve th|s techn|ca| rcb|ea, and the eccncay W||| rcar bac| tc |||e.
ucW, aany ec|e ||nd th|s aessaqe |undaaenta||y |a|aus|b|e, even c||ens|ve. it seeas cn|y natura| tc sucse that |arqe rcb|eas aust
have |arqe causes, that aass unea|cyaent aust be the resu|t c| scaeth|nq deeer than a aere audd|e. 1hat's Why keynes used h|s
aaqnetc ana|cqy. we a|| |ncW that scaet|aes a s100 battery re|aceaent |s a|| |t ta|es tc qet a sta||ed s30,000 car bac| cn the rcad, and he
hced tc ccnv|nce readers that a s|a||ar d|srccrt|cn betWeen cause and e||ect can a|y tc deress|cns. uut th|s c|nt Was and |s hard |cr
aany ec|e, |nc|ud|nq thcse Whc be||eve thease|ves We||-|n|craed, tc accet.
|art|y that's because |t just |ee|s Wrcnq tc attr|bute such devastat|cn tc a re|at|ve|y a|ncr aa||unct|cn. |art|y, tcc, there's a strcnq des|re tc
see eccnca|cs as a acra||ty |ay, |n Wh|ch bad t|aes are the |ne|uctab|e un|shaent |cr rev|cus excesses. in 2010 ay W||e and i had the
ccrtun|ty tc hear a seech cn eccnca|c c||cy by wc||qanq schub|e, the Geraan ||nance a|n|ster, a|dWay thrcuqh, she |eaned cver and
Wh|sered, As We |eave the rcca, We'|| be q|ven Wh|s tc sccurqe curse|ves. schub|e |s, ada|tted|y, even acre c| a ||re-and-br|astcne
reacher than acst ||nanc|a| c|||c|a|s, but aany share h|s tendenc|es. And the ec|e Whc say such th|nqsWhc saqe|y dec|are that cur
rcb|eas have dee rccts and nc easy sc|ut|cn, that We a|| have tc adjust tc a acre austere cut|cc|scund W|se and rea||st|c, even thcuqh
they're utter|y Wrcnq.
what i hce tc dc |n th|s chater |s ccnv|nce ycu that We dc, |n |act, have aaqnetc trcub|e. 1he scurces c| cur su||er|nq are re|at|ve|y
tr|v|a| |n the scheae c| th|nqs, and ccu|d be ||xed u|c||y and |a|r|y eas||y || encuqh ec|e |n cs|t|cns c| cWer understccd the rea||t|es.
Mcrecver, |cr the qreat aajcr|ty c| ec|e the rccess c| ||x|nq the eccncay Wcu|d nct be a|n|u| and |nvc|ve sacr|||ces, cn the ccntrary,
end|nq th|s deress|cn Wcu|d be a |ee|-qccd exer|ence |cr a|acst everycne excet thcse Whc are c||t|ca||y, eact|cna||y, and rc|ess|cna||y
|nvested |n Wrcnqheaded eccnca|c dcctr|nes.
ucW, |et ae be c|ear. |n say|nq that the causes c| cur eccnca|c d|saster are re|at|ve|y tr|v|a|, i aa nct say|nq that they eaerqed at randca
cr caae cut c| th|n a|r. ucr aa i say|nq that |t's easy as a c||t|ca| aatter tc qet curse|ves cut c| th|s aess. it tcc| decades c| bad c||c|es
and bad |deas tc qet us |ntc th|s deress|cnbad c||c|es and bad |deas that, as We'|| see |n chater +, ||cur|shed because |cr a |cnq t|ae they
Wcr|ed very We||, nct |cr the nat|cn as a Whc|e but |cr a hand|u| c| very Wea|thy, very |n||uent|a| ec|e. And thcse bad c||c|es and bad
|deas have a cWer|u| qr| cn cur c||t|ca| cu|ture, aa||nq |t very hard tc chanqe ccurse even |n the |ace c| eccnca|c catastrche. As a ure|y
eccnca|c aatter, hcWever, th|s cr|s|s |sn't hard tc sc|ve, We ccu|d have a u|c|, cWer|u| reccvery || cn|y We ccu|d ||nd the |nte||ectua| c|ar|ty
and c||t|ca| W||| tc act.
1h|n| c| |t th|s Way. sucse that ycur husband has, |cr Whatever reascn, re|used tc aa|nta|n the |aa||y car's e|ectr|ca| systea cver the
years. ucW the car Wcn't start, but he re|uses even tc ccns|der re|ac|nq the battery, |n art because that Wcu|d aean ada|tt|nq that he Was
Wrcnq be|cre, and he |ns|sts |nstead that the |aa||y aust |earn tc Wa|| and ta|e buses. C|ear|y, ycu have a rcb|ea, and |t aay even be an
|nsc|ub|e rcb|ea as |ar as ycu are ccncerned. uut |t's a rcb|ea W|th ycur husband, nct W|th the |aa||y car, Wh|ch ccu|d and shcu|d be
eas||y ||xed.
Ok, encuqh aetahcrs. tet's ta|| abcut What has qcne Wrcnq W|th the Wcr|d eccncay.
Lt's A|| about Demand
why |s unea|cyaent sc h|qh, and eccnca|c cutut sc |cW uecause WeWhere by We i aean ccnsuaers, bus|nesses, and qcvernaents
ccab|nedaren't send|nq encuqh. send|nq cn hcae ccnstruct|cn and ccnsuaer qccds |unqed When the tW|n hcus|nq bubb|es |n Aaer|ca
and |urce burst. uus|ness |nvestaent sccn |c||cWed, because there's nc c|nt |n exand|nq caac|ty When sa|es are shr|n||nq, and a |ct c|
qcvernaent send|nq has a|sc |a||en as |cca|, state, and scae nat|cna| qcvernaents have |cund thease|ves starved |cr revenue. tcW
send|nq, |n turn, aeans |cW ea|cyaent, because bus|nesses Wcn't rcduce What they can't se||, and they Wcn't h|re Wcr|ers || they dcn't
need thea |cr rcduct|cn. we are su||er|nq |rca a severe cvera|| |ac| c| deaand.
Att|tudes tcWard What i just sa|d vary W|de|y. scae ccaaentatcrs ccns|der |t sc cbv|cus as nct tc be Wcrth d|scuss|nq. Others, hcWever,
reqard |t as ncnsense. 1here are |ayers cn the c||t|ca| |andscae|acrtant |ayers, W|th rea| |n||uenceWhc dcn't be||eve that |t's css|b|e
|cr the eccncay as a Whc|e tc su||er |rca |nadeuate deaand. 1here can be |ac| c| deaand |cr scae qccds, they say, but there can't be tcc
||tt|e deaand acrcss the bcard. why uecause, they c|a|a, ec|e have tc send the|r |nccae cn scaeth|nq.
1h|s |s the |a||acy keynes ca||ed say's taW, |t's a|sc scaet|aes ca||ed the 1reasury v|eW, a re|erence nct tc cur 1reasury but tc u|s
Majesty's 1reasury |n the 1930s, an |nst|tut|cn that |ns|sted that any qcvernaent send|nq Wcu|d a|Ways d|s|ace an eua| aacunt c| r|vate
send|nq. 1ust sc ycu |ncW that i'a nct descr|b|nq a straW aan, here's ur|an k|ed| c| the uer|taqe |cundat|cn (a r|qht-W|nq th|n| tan|) |n an
ear|y-2009 |nterv|eW W|th uat|cna| kev|eW.
1he qrand keynes|an ayth |s that ycu can send acney and thereby |ncrease deaand. And |t's a ayth because Ccnqress dces nct have a
vau|t c| acney tc d|str|bute |n the eccncay. |very dc||ar Ccnqress |njects |ntc the eccncay aust ||rst be taxed cr bcrrcWed cut c| the
eccncay. ?cu're nct creat|nq neW deaand, ycu're just trans|err|nq |t |rca cne qrcu c| ec|e tc ancther.
G|ve k|ed| scae cred|t. un|||e aany ccnservat|ves, he ada|ts that h|s arquaent a||es tc any scurce c| neW send|nq. 1hat |s, he ada|ts
that h|s arquaent that a qcvernaent send|nq rcqraa can't ra|se ea|cyaent |s a|sc an arquaent that, say, a bcca |n bus|ness |nvestaent
can't ra|se ea|cyaent e|ther. And |t shcu|d a|y tc |a|||nq as We|| as r|s|nq send|nq. i|, say, debt-burdened ccnsuaers chccse tc send
sS00 b||||cn |ess, that acney, acccrd|nq tc ec|e |||e k|ed|, aust be qc|nq |ntc ban|s, Wh|ch W||| |end |t cut, sc that bus|nesses cr cther
ccnsuaers W||| send sS00 b||||cn acre. i| bus|nesses a|ra|d c| that scc|a||st |n the wh|te ucuse sca|e bac| the|r |nvestaent send|nq, the
acney they thereby re|ease aust be sent by |ess nervcus bus|nesses cr ccnsuaers. Acccrd|nq tc k|ed|'s |cq|c, cvera|| |ac| c| deaand can't
hurt the eccncay, because |t just can't haen.
Obv|cus|y i dcn't be||eve th|s, and |n qenera| sens|b|e ec|e dcn't. uut hcW dc We shcW that |t's Wrcnq ucW can ycu ccnv|nce ec|e that
|t's Wrcnq we||, ycu can try tc Wcr| thrcuqh the |cq|c verba||y, but ay exer|ence |s that When ycu try tc have th|s ||nd c| d|scuss|cn W|th a
detera|ned ant|-keynes|an, ycu end u cauqht |n Wcrd qaaes, W|th ncbcdy ersuaded. ?cu can Wr|te dcWn a ||tt|e aatheaat|ca| acde| tc
|||ustrate the |ssues, but th|s Wcr|s cn|y W|th eccnca|sts, nct W|th ncraa| huaan be|nqs (and |t dcesn't even Wcr| W|th scae eccnca|sts).
Or ycu can te|| a true stcryWh|ch br|nqs ae tc ay |avcr|te eccnca|cs stcry. the babys|tt|nq cc-c.
1he stcry Was ||rst tc|d |n a 1977 art|c|e |n the 1curna| c| Mcney, Cred|t and uan||nq, Wr|tten by 1can and k|chard sWeeney, Whc ||ved
thrcuqh the exer|ence, and t|t|ed Mcnetary 1hecry and the Great Ca|tc| u||| uaby s|tt|nq Cc-c cr|s|s. 1he sWeeneys Were aeabers c| a
babys|tt|nq cc-c. an asscc|at|cn c| arcund 1S0 ycunq ccu|es, aa|n|y ccnqress|cna| sta||ers, Whc saved acney cn babys|tters by |cc||nq
a|ter each cther's ch||dren.
1he re|at|ve|y |arqe s|ze c| the cc-c c||ered a b|q advantaqe, s|nce the cdds c| ||nd|nq scaecne ab|e tc dc babys|tt|nq cn a n|qht ycu
Wanted tc qc cut Were qccd. uut there Was a rcb|ea. hcW ccu|d the cc-c's |cunders ensure that each ccu|e d|d |ts |a|r share c|
babys|tt|nq
1he cc-c's ansWer Was a scr| systea. ccu|es Whc jc|ned the cc-c Were |ssued tWenty ccucns, each ccrrescnd|nq tc cne ha|| hcur c|
babys|tt|nq t|ae. (ucn |eav|nq the cc-c, they Were exected tc q|ve the saae nuaber c| ccucns bac|.) whenever babys|tt|nq tcc| |ace,
the babys|ttees Wcu|d q|ve the babys|tters the arcr|ate nuaber c| ccucns. 1h|s ensured that cver t|ae each ccu|e Wcu|d dc as auch
babys|tt|nq as |t rece|ved, because ccucns surrendered |n return |cr serv|ces Wcu|d have tc be re|aced.
|ventua||y, hcWever, the cc-c qct |ntc b|q trcub|e. On averaqe, ccu|es Wcu|d try tc |ee a reserve c| babys|tt|nq ccucns |n the|r des|
draWers, just |n case they needed tc qc cut severa| t|aes |n a rcW. uut |cr reascns nct Wcrth qett|nq |ntc, there caae a c|nt at Wh|ch the
nuaber c| babys|tt|nq ccucns |n c|rcu|at|cn Was substant|a||y |ess than the reserve the averaqe ccu|e Wanted tc |ee cn hand.
sc What haened Ccu|es, nervcus abcut the|r |cW reserves c| babys|tt|nq ccucns, Were re|uctant tc qc cut unt|| they had |ncreased
the|r hcards by babys|tt|nq cther ccu|es' ch||dren. uut rec|se|y because aany ccu|es Were re|uctant tc qc cut, ccrtun|t|es tc earn
ccucns thrcuqh babys|tt|nq becaae scarce. 1h|s aade ccucn-ccr ccu|es even acre re|uctant tc qc cut, and the vc|uae c| babys|tt|nq |n
the cc-c |e|| shar|y.
in shcrt, the babys|tt|nq cc-c |e|| |ntc a deress|cn, Wh|ch |asted unt|| the eccnca|sts |n the qrcu aanaqed tc ersuade the bcard tc
|ncrease the su|y c| ccucns.
what dc We |earn |rca th|s stcry i| ycu say ncth|nq, because |t seeas tcc cute and tr|v|a|, shaae cn ycu. 1he Ca|tc| u||| babys|tt|nq cc-
c Was a rea|, || a|n|ature, acnetary eccncay. it |ac|ed aany c| the |eatures c| the encracus systea We ca|| the Wcr|d eccncay, but |t had
cne |eature that |s cruc|a| tc understand|nq What has qcne Wrcnq W|th that Wcr|d eccncaya |eature that seeas, t|ae and aqa|n, tc be
beycnd the ab|||ty c| c||t|c|ans and c||cy aa|ers tc qras.
what |s that |eature it |s the |act that ycur send|nq |s ay |nccae, and ay send|nq |s ycur |nccae.
isn't that cbv|cus uct tc aany |n||uent|a| ec|e.
|cr exaa|e, |t c|ear|y Wasn't cbv|cus tc 1chn ucehner, the sea|er c| the u.s. ucuse, Whc ccsed |res|dent Obaaa's eccnca|c |ans,
arqu|nq that s|nce Aaer|cans Were su||er|nq, |t Was t|ae |cr the u.s. qcvernaent tc t|qhten |ts be|t tcc. (1c the qreat d|saay c| ||bera|
eccnca|sts, Obaaa ended u echc|nq that ||ne |n h|s cWn seeches.) 1he uest|cn ucehner d|dn't as| h|ase|| Was, || crd|nary c|t|zens are
t|qhten|nq the|r be|tssend|nq |essand the qcvernaent a|sc sends |ess, Whc |s qc|nq tc buy Aaer|can rcducts
s|a||ar|y, the c|nt that every |nd|v|dua|'s |nccaeand every ccuntry's |nccae, tcc|s scaecne e|se's send|nq |s c|ear|y nct cbv|cus tc
aany Geraan c|||c|a|s, Whc c|nt tc the|r ccuntry's turnarcund betWeen the |ate 1990s and tcday as a acde| |cr everycne e|se tc |c||cW. 1he
|ey tc that turnarcund Was a acve cn Geraany's art |rca trade de||c|t tc trade sur|usthat |s, |rca buy|nq acre |rca abrcad than |t sc|d
abrcad tc the reverse. uut that Was css|b|e cn|y because cther ccuntr|es (aa|n|y |n scuthern |urce) ccrrescnd|nq|y acved dee |ntc trade
de||c|t. ucW We're a|| |n trcub|e, but We can't a|| se|| acre than We buy. ?et the Geraans dcn't seea tc qras that, erhas because they dcn't
Want tc.
And because the babys|tt|nq cc-c, |cr a|| |ts s|a||c|ty and t|ny sca|e, had th|s cruc|a|, nct at a|| cbv|cus |eature that's a|sc true c| the Wcr|d
eccncay, the cc-c's exer|ences can serve as rcc| c| ccncet |cr scae |acrtant eccnca|c |deas. in th|s case, We |earn at |east three
|acrtant |esscns.
||rst, We |earn that an cvera|| |nadeuate |eve| c| deaand |s |ndeed a rea| css|b|||ty. when ccucn-shcrt aeabers c| the babys|tt|nq cc-c
dec|ded tc stc send|nq ccucns cn n|qhts cut, that dec|s|cn d|dn't |ead tc any autcaat|c c||sett|nq r|se |n send|nq by cther cc-c
aeabers, cn the ccntrary, the reduced ava||ab|||ty c| babys|tt|nq ccrtun|t|es aade everycne send |ess. |ec|e |||e ur|an k|ed| are r|qht
that send|nq aust a|Ways eua| |nccae. the nuaber c| babys|tt|nq ccucns earned |n a q|ven Wee| Was a|Ways eua| tc the nuaber c|
ccucns sent. uut th|s dcesn't aean that ec|e W||| a|Ways send encuqh tc aa|e |u|| use c| the eccncay's rcduct|ve caac|ty, |t can
|nstead aean that encuqh caac|ty stands |d|e tc deress |nccae dcWn tc the |eve| c| send|nq.
seccnd, an eccncay rea||y can be deressed than|s tc aaqnetc trcub|e, that |s, than|s tc |a||ures c| cccrd|nat|cn rather than |ac| c|
rcduct|ve caac|ty. 1he cc-c d|dn't qet |ntc trcub|e because |ts aeabers Were bad babys|tters, cr because h|qh tax rates cr tcc-qenercus
qcvernaent handcuts aade thea unW||||nq tc ta|e babys|tt|nq jcbs, cr because they Were ay|nq the |nev|tab|e r|ce |cr ast excesses. it qct
|ntc trcub|e |cr a seea|nq|y tr|v|a| reascn. the su|y c| ccucns Was tcc |cW, and th|s created a cc|cssa| audd|e, as keynes ut |t, |n Wh|ch
the aeabers c| the cc-c Were, as |nd|v|dua|s, try|nq tc dc scaeth|nqadd tc the|r hcards c| ccucnsthat they ccu|d nct, as a qrcu,
actua||y dc.
1h|s |s a cruc|a| |ns|qht. 1he current cr|s|s |n the q|cba| eccncayan eccncay that's rcuqh|y +0 a||||cn t|aes as |arqe as the babys|tt|nq cc-
c|s, |cr a|| the d|||erences |n sca|e, very s|a||ar |n character tc the rcb|eas c| the cc-c. Cc||ect|ve|y, the Wcr|d's res|dents are try|nq tc
buy |ess stu|| than they are caab|e c| rcduc|nq, tc send |ess than they earn. 1hat's css|b|e |cr an |nd|v|dua|, but nct |cr the Wcr|d as a
Whc|e. And the resu|t |s the devastat|cn a|| arcund us.
tet ae say a b|t acre abcut that, c||er|nq a br|e| and s|a||||ed rev|eW c| the |cnqer ex|anat|cn tc ccae. i| We |cc| at the state c| the
Wcr|d cn the eve c| the cr|s|ssay, |n 200S-07We see a |cture |n Wh|ch scae ec|e Were cheer|u||y |end|nq a |ct c| acney tc cther
ec|e, Whc Were cheer|u||y send|nq that acney. u.s. ccrcrat|cns Were |end|nq the|r excess cash tc |nvestaent ban|s, Wh|ch |n turn Were
us|nq the |unds tc ||nance hcae |cans, Geraan ban|s Were |end|nq excess cash tc san|sh ban|s, Wh|ch Were a|sc us|nq the |unds tc ||nance
hcae |cans, and sc cn. scae c| thcse |cans Were used tc buy neW hcuses, sc that the |unds ended u sent cn ccnstruct|cn. scae c| the
|cans Were used tc extract acney |rca hcae eu|ty, Wh|ch Was used tc buy ccnsuaer qccds. And because ycur send|nq |s ay |nccae,
there Were |enty c| sa|es, and jcbs Were re|at|ve|y easy tc ||nd.
1hen the aus|c stced. tenders becaae auch acre caut|cus abcut aa||nq neW |cans, the ec|e Whc had been bcrrcW|nq Were |crced
tc cut bac| shar|y cn the|r send|nq. And here's the rcb|ea. ncbcdy e|se Was ready tc ste u and send |n the|r |ace. sudden|y, tcta|
send|nq |n the Wcr|d eccncay |unqed, and because ay send|nq |s ycur |nccae and ycur send|nq |s ay |nccae, |nccaes and
ea|cyaent |unqed tcc.
sc can anyth|nq be dcne 1hat's Where We ccae tc the th|rd |esscn |rca the babys|tt|nq cc-c. b|q eccnca|c rcb|eas can scaet|aes
have s|a|e, easy sc|ut|cns. 1he cc-c qct cut c| |ts aess s|a|y by r|nt|nq u acre ccucns.
1h|s ra|ses the |ey uest|cn. Ccu|d We cure the q|cba| s|ua the saae Way wcu|d r|nt|nq acre babys|tt|nq ccucns, a|a |ncreas|nq the
acney su|y, be a|| that |t ta|es tc qet Aaer|cans bac| tc Wcr|
we||, the truth |s that r|nt|nq acre babys|tt|nq ccucns |s the Way We ncraa||y qet cut c| recess|cns. |cr the |ast |||ty years the bus|ness c|
end|nq recess|cns has bas|ca||y been the jcb c| the |edera| keserve, Wh|ch (|ccse|y sea||nq) ccntrc|s the uant|ty c| acney c|rcu|at|nq |n the
eccncay, When the eccncay turns dcWn, the |ed cran|s u the r|nt|nq resses. And unt|| ncW th|s has a|Ways Wcr|ed. it Wcr|ed
sectacu|ar|y a|ter the severe recess|cn c| 1981-82, Wh|ch the |ed Was ab|e tc turn W|th|n a |eW acnths |ntc a ra|d eccnca|c reccvery
acrn|nq |n Aaer|ca. it Wcr|ed, a|be|t acre s|cW|y and acre hes|tant|y, a|ter the 1990-91 and 2001 recess|cns.
uut |t d|dn't Wcr| th|s t|ae arcund. i just sa|d that the |ed |ccse|y sea||nq ccntrc|s the acney su|y, What |t actua||y ccntrc|s |s the
acnetary base, the sua c| currency |n c|rcu|at|cn and reserves he|d by ban|s. we||, the |ed has tr||ed the s|ze c| the acnetary base s|nce
2008, yet the eccncay reaa|ns deressed. sc |s ay arquaent that We're su||er|nq |rca |nadeuate deaand Wrcnq
uc, |t |sn't. in |act, the |a||ure c| acnetary c||cy tc resc|ve th|s cr|s|s Was red|ctab|eand red|cted. i Wrcte the cr|q|na| vers|cn c| ay
bcc| 1he keturn c| Deress|cn |ccnca|cs, bac| |n 1999, aa|n|y tc Warn Aaer|cans that 1aan had a|ready |cund |tse|| |n a cs|t|cn Where
r|nt|nq acney ccu|dn't rev|ve |ts deressed eccncay, and that the saae th|nq ccu|d haen tc us. uac| then a nuaber c| cther eccnca|sts
shared ay Wcrr|es. Aacnq thea Was ncne cther than uen uernan|e, ncW the |ed cha|raan.
sc What d|d haen tc us we |cund curse|ves |n the unhay ccnd|t|cn |ncWn as a ||u|d|ty tra.
1he Liquidity 1rap
in the a|dd|e years c| the |ast decade, the u.s. eccncay Was cWered by tWc b|q th|nqs. |cts c| hcus|nq ccnstruct|cn and strcnq ccnsuaer
send|nq. ucth c| these th|nqs Were, |n turn, dr|ven by h|qh and r|s|nq hcus|nq r|ces, Wh|ch |ed bcth tc a bu||d|nq bcca and tc send|nq by
ccnsuaers Whc |e|t r|ch. uut the hcus|nq r|ce r|se Was, |t turns cut, a bubb|e, based cn unrea||st|c exectat|cns. And When that bubb|e burst,
|t brcuqht bcth ccnstruct|cn and ccnsuaer send|nq dcWn W|th |t. in 2006, the ea| c| the bubb|e, bu||ders brc|e qrcund |cr 1.8 a||||cn
hcus|nq un|ts, |n 2010 they brc|e qrcund |cr cn|y S8S,000. in 2006 Aaer|can ccnsuaers bcuqht 16.S a||||cn cars and ||qht truc|s, |n 2010
they bcuqht cn|y 11.6 a||||cn. |cr abcut a year a|ter the hcus|nq bubb|e ced, the u.s. eccncay |et |ts head abcve Water by |ncreas|nq
excrts, but by the end c| 2007 |t Was headed dcWn, and |t has never rea||y reccvered.
1he |edera| keserve, as i've a|ready aent|cned, rescnded by ra|d|y |ncreas|nq the acnetary base. ucW, the |edun|||e the bcard c| the
babys|tt|nq cc-cdcesn't hand cut ccucns tc |aa|||es, When |t Wants tc |ncrease the acney su|y, |t bas|ca||y |ends the |unds tc ban|s,
hc|nq that the ban|s W||| |end thcse |unds cut |n turn. (it usua||y buys bcnds |rca ban|s rather than aa||nq d|rect |cans, but |t's acre cr
|ess the saae th|nq.)
1h|s scunds very d|||erent |rca What the cc-c d|d, but the d|||erence |sn't actua||y very b|q. keaeaber, the ru|e c| the cc-c sa|d that ycu
had tc return as aany ccucns When ycu |e|t as ycu rece|ved cn enter|nq, sc thcse ccucns Were |n a Way a |can |rca aanaqeaent.
increas|nq the su|y c| ccucns there|cre d|dn't aa|e ccu|es r|cherthey st||| had tc dc as auch babys|tt|nq as they rece|ved. what |t d|d,
|nstead, Was aa|e thea acre ||u|d, |ncreas|nq the|r ab|||ty tc send When they Wanted W|thcut Wcrry|nq abcut runn|nq cut c| |unds.
ucW, cut |n the ncn-babys|tt|nq Wcr|d ec|e and bus|nesses can a|Ways add tc the|r ||u|d|ty, but at a r|ce. they can bcrrcW cash, but
have tc ay |nterest cn bcrrcWed |unds. what the |ed can dc by ush|nq acre cash |ntc the ban|s |s dr|ve dcWn |nterest rates, Wh|ch are the
r|ce c| ||u|d|tyand a|sc, c| ccurse, the r|ce c| bcrrcW|nq tc ||nance |nvestaent cr cther send|nq. sc |n the ncn-babys|tt|nq eccncay, the
|ed's ab|||ty tc dr|ve the eccncay ccaes v|a |ts ab|||ty tc acve |nterest rates.
uut here's the th|nq. |t can ush |nterest rates dcWn cn|y sc |ar. sec|||ca||y, |t can't ush thea be|cW zerc, because When rates qet c|cse tc
zerc, just s|tt|nq cn cash |s a better ct|cn than |end|nq acney tc cther ec|e. And |n the current s|ua |t d|dn't ta|e |cnq |cr the |ed tc h|t
th|s zerc |cWer bcund. |t started cutt|nq rates |n |ate 2007 and had h|t zerc by |ate 2008. un|crtunate|y, a zerc rate turned cut nct tc be |cW
encuqh, because the burst|nq c| the hcus|nq bubb|e had dcne sc auch daaaqe. Ccnsuaer send|nq reaa|ned Wea|, hcus|nq stayed ||at cn
|ts bac|, bus|ness |nvestaent Was |cW, because Why exand W|thcut strcnq sa|es And unea|cyaent reaa|ned d|sastrcus|y h|qh.
And that's the ||u|d|ty tra. |t's What haens When zerc |sn't |cW encuqh, When the |ed has saturated the eccncay W|th ||u|d|ty tc such
an extent that there's nc ccst tc hc|d|nq acre cash, yet cvera|| deaand reaa|ns tcc |cW.
tet ae qc bac| tc the babys|tt|nq cc-c cne |ast t|ae, tc rcv|de What i hce |s a he||u| ana|cqy. sucse |cr scae reascn a||, cr at |east
acst, c| the cc-c's aeabers dec|ded that they Wanted tc run a sur|us th|s year, utt|nq |n acre t|ae a|nd|nq cther ec|e's ch||dren than
the aacunt c| babys|tt|nq they rece|ved |n return, sc that they ccu|d dc the reverse next year. in that case the cc-c Wcu|d have been |n
trcub|e nc aatter hcW aany ccucns the bcard |ssued. Any |nd|v|dua| ccu|e ccu|d accuau|ate ccucns and save |cr next year, but the cc-
c as a Whc|e ccu|dn't, s|nce babys|tt|nq t|ae can't be stcred. sc there Wcu|d have been a |undaaenta| ccntrad|ct|cn betWeen What |nd|v|dua|
ccu|es Were try|nq tc dc and What Was css|b|e at the cc-c-W|de |eve|. cc||ect|ve|y, the cc-c's aeabers ccu|dn't send |ess than the|r
|nccae. Aqa|n, th|s ccaes bac| tc the |undaaenta| c|nt that ay send|nq |s ycur |nccae and ycur send|nq |s ay |nccae. And the resu|t c|
the atteat by |nd|v|dua| ccu|es tc dc What they ccu|d nct, as a qrcu, actua||y dc Wcu|d have been a deressed (and rcbab|y |a||ed) cc-c
nc aatter hcW ||bera| the ccucn c||cy.
1hat's acre cr |ess What has haened tc Aaer|ca and the Wcr|d eccncay as a Whc|e. when everycne sudden|y dec|ded that debt |eve|s
Were tcc h|qh, debtcrs Were |crced tc send |ess, but cred|tcrs Weren't W||||nq tc send acre, and the resu|t has been a deress|cnnct a
Great Deress|cn, but a deress|cn a|| the saae.
?et sure|y there aust be Ways tc ||x th|s. it can't aa|e sense |cr sc auch c| the Wcr|d's rcduct|ve caac|ty tc s|t |d|e, |cr sc aany W||||nq
Wcr|ers tc be unab|e tc ||nd Wcr|. And yes, there are Ways cut. ue|cre i qet there, hcWever, |et's ta|| br|e||y abcut the v|eWs c| thcse Whc
dcn't be||eve any c| What i've just sa|d.
Ls Lt Structura|2
i be||eve th|s resent |abcr su|y c| curs |s ecu||ar|y unadatab|e and untra|ned. it cannct rescnd tc the ccrtun|t|es Wh|ch |ndustry
aay c||er. 1h|s |a||es a s|tuat|cn c| qreat |neua||ty|u|| ea|cyaent, auch cver-t|ae, h|qh Waqes, and qreat rcser|ty |cr certa|n
|avcred qrcus, acccaan|ed by |cW Waqes, shcrt t|ae, unea|cyaent, and css|b|y dest|tut|cn |cr cthers.
|Wan C|aque
1he uctat|cn abcve ccaes |rca an art|c|e |n the 1curna| c| the Aaer|can stat|st|ca| Asscc|at|cn. it aa|es an arquaent cne hears |rca aany
uarters these days. that the |undaaenta| rcb|eas We have run deeer than a aere |ac| c| deaand, that tcc aany c| cur Wcr|ers |ac| the
s||||s the tWenty-||rst-century eccncay reu|res, cr tcc aany c| thea are st||| stuc| |n the Wrcnq |ccat|cns cr the Wrcnq |ndustry.
uut i've just |ayed a ||tt|e tr|c| cn ycu. the art|c|e |n uest|cn Was ub||shed |n 193S. 1he authcr Was c|a|a|nq that even || scaeth|nq Were
tc |ead tc a qreat surqe |n the deaand |cr Aaer|can Wcr|ers, unea|cyaent Wcu|d reaa|n h|qh, because thcse Wcr|ers Weren't u tc the
jcb. uut he Was cca|ete|y Wrcnq. When that surqe |n deaand ||na||y caae, than|s tc the a|||tary bu||du that receded Aaer|ca's entry |ntc
wcr|d war ii, a|| thcse a||||cns c| unea|cyed Wcr|ers rcved er|ect|y caab|e c| resua|nq a rcduct|ve rc|e.
?et ncW, as then, there seeas tc be a strcnq urqean urqe nct restr|cted tc cne s|de c| the c||t|ca| d|v|detc see cur rcb|eas as
structura|, nct eas||y resc|ved thrcuqh an |ncrease |n deaand. i| We stay W|th the aaqnetc trcub|e ana|cqy, What aany |n||uent|a| ec|e
arque |s that re|ac|nq the battery Wcn't Wcr|, because there aust be b|q rcb|eas W|th the enq|ne and the dr|ve tra|n tcc.
scaet|aes th|s arquaent |s resented |n teras c| a qenera| |ac| c| s||||s. |cr exaa|e, |craer res|dent u||| C||ntcn (i tc|d ycu th|s Wasn't
cca|nq just |rca cne s|de c| the c||t|ca| d|v|de) tc|d the 1v shcW 60 M|nutes that unea|cyaent reaa|ned h|qh because ec|e dcn't have
the jcb s||||s |cr the jcbs that are cen. scaet|aes |t's |raaed |n teras c| a stcry abcut hcW technc|cqy |s s|a|y aa||nq Wcr|ers
unnecessaryWh|ch |s What |res|dent Obaaa seeaed tc be say|nq When he tc|d the 1cday shcW,
1here are scae structura| |ssues W|th cur eccncay Where a |ct c| bus|nesses have |earned tc be auch acre e|||c|ent W|th |eWer Wcr|ers.
?cu see |t When ycu qc tc a ban| and ycu use an A1M, ycu dcn't qc tc a ban| te||er. Or ycu see |t When ycu qc tc the a|rcrt and ycu
use a ||cs| |nstead c| chec||nq at the qate. [ay eahas|s]
And acst ccaacn c| a|| |s the assert|cn that We can't exect a return tc |u|| ea|cyaent anyt|ae sccn, because We need tc trans|er Wcr|ers
cut c| an cverb|cWn hcus|nq sectcr and retra|n thea |cr cther jcbs. uere's Char|es ||csser, the res|dent c| the |edera| keserve uan| c|
k|chacnd, and an |acrtant vc|ce arqu|nq aqa|nst c||c|es tc exand deaand.
?cu can't chanqe the carenter |ntc a nurse eas||y, and ycu can't chanqe the acrtqaqe brc|er |ntc a ccauter exert |n a aanu|actur|nq
|ant very eas||y. |ventua||y that stu|| W||| scrt |tse|| cut. |ec|e W||| be retra|ned and they'|| ||nd jcbs |n cther |ndustr|es. uut acnetary
c||cy can't retra|n ec|e. Mcnetary c||cy can't ||x thcse rcb|eas. [ay eahas|s]
Ok, hcW dc We |ncW that a|| c| th|s |s Wrcnq
|art c| the ansWer |s that ||csser's |a||c|t |cture c| the unea|cyedthat the ty|ca| unea|cyed Wcr|er |s scaecne Whc Was |n the
ccnstruct|cn sectcr, and hasn't adated tc the Wcr|d a|ter the hcus|nq bubb|e|s just Wrcnq. O| the 13 a||||cn u.s. Wcr|ers Whc Were
unea|cyed |n Octcber 2011, cn|y 1.1 a||||cn (a aere 8 ercent) had rev|cus|y been ea|cyed |n ccnstruct|cn.
Mcre brcad|y, || the rcb|ea |s that aany Wcr|ers have the Wrcnq s||||s, cr are |n the Wrcnq |ace, thcse Wcr|ers W|th the r|qht s||||s |n the
r|qht |ace shcu|d be dc|nq We||. 1hey shcu|d be exer|enc|nq |u|| ea|cyaent and r|s|nq Waqes. sc Where are these ec|e
1c be |a|r, there |s |u|| ea|cyaent, even a |abcr shcrtaqe, cn the u|qh ||a|ns. uebras|a and the Da|ctas have |cW unea|cyaent by
h|stcr|ca| standards, |arqe|y than|s tc a surqe |n qas dr||||nq. uut thcse three states have a ccab|ned cu|at|cn cn|y s||qht|y |arqer than that
c| urcc||yn, and unea|cyaent |s h|qh everyWhere e|se.
And there are nc aajcr cccuat|cns cr s|||| qrcus dc|nq We||. uetWeen 2007 and 2010 unea|cyaent rcuqh|y dcub|ed |n just abcut every
cateqcryb|ue-cc||ar and Wh|te-cc||ar, aanu|actur|nq and serv|ces, h|qh|y educated and uneducated. ucbcdy Was qett|nq b|q Waqe |ncreases,
|n |act, as We saW |n chater 1, h|qh|y educated qraduates Were ta||nq unusua||y |arqe ay cuts, because they Were |crced tc accet jcbs that
aade nc use c| the|r educat|cn.
1he bcttca ||ne |s that || We had aass unea|cyaent because tcc aany Wcr|ers |ac|ed the k|qht stu||, We shcu|d be ab|e tc ||nd a
s|qn|||cant nuaber c| Wcr|ers Whc dc have that stu|| rcser|nqand We can't. what We see |nstead |s |acver|shaent a|| arcund, Wh|ch |s
What haens When the eccncay su||ers |rca |nadeuate deaand.
sc We have an eccncay cr||ed by |ac| c| deaand, the r|vate sectcr, cc||ect|ve|y, |s try|nq tc send |ess than |t earns, and the resu|t |s
that |nccae has |a||en. ?et We're |n a ||u|d|ty tra. the |ed can't ersuade the r|vate sectcr tc send acre just by |ncreas|nq the uant|ty c|
acney |n c|rcu|at|cn. what |s the sc|ut|cn 1he ansWer |s cbv|cus, the rcb|ea |s that sc aany |n||uent|a| ec|e re|use tc see that cbv|cus
ansWer.
Spendinq Our way to rosperity
in the a|dd|e c| 1939 the u.s. eccncay Was ast the Wcrst c| the Great Deress|cn, but the deress|cn Was by nc aeans cver. 1he
qcvernaent Was nct yet cc||ect|nq ccarehens|ve data cn ea|cyaent and unea|cyaent, but as best We can te|| the unea|cyaent rate as
We ncW de||ne |t Was cver 11 ercent. 1hat seeaed tc aany ec|e |||e a eraanent state. the ct|a|sa c| the ear|y ueW Dea| years had
ta|en a hard b|cW |n 1937, When the eccncay su||ered a seccnd severe recess|cn.
?et W|th|n tWc years the eccncay Was bcca|nq, and unea|cyaent Was |unq|nq. what haened
1he ansWer |s that ||na||y scaecne beqan send|nq encuqh tc qet the eccncay huaa|nq aqa|n. 1hat scaecne Was, c| ccurse, the
qcvernaent.
1he cbject c| that send|nq Was bas|ca||y destruct|cn rather than ccnstruct|cn, as the eccnca|sts kcbert Gcrdcn and kcbert krenn ut |t, |n
the suaaer c| 19+0 the u.s. eccncay Went tc War. tcnq be|cre |ear| uarbcr, a|||tary send|nq scared as Aaer|ca rushed tc re|ace the
sh|s and cther araaaents sent tc ur|ta|n as art c| the |end-|ease rcqraa, and as aray caas Were u|c||y bu||t tc hcuse the a||||cns c|
neW recru|ts brcuqht |n by the dra|t. As a|||tary send|nq created jcbs and |aa||y |nccaes rcse, ccnsuaer send|nq a|sc |c|ed u (|t Wcu|d
eventua||y be restra|ned by rat|cn|nq, but that caae |ater). As bus|nesses saW the|r sa|es qrcW|nq, they a|sc rescnded by raa|nq u
send|nq.
And just |||e that, the Deress|cn Was cver, and a|| thcse unadatab|e and untra|ned Wcr|ers Were bac| cn the jcb.
D|d |t aatter that the send|nq Was |cr de|ense, nct dcaest|c rcqraas in eccnca|c teras, nct at a||. send|nq creates deaand, Whatever
|t's |cr. in c||t|ca| teras, c| ccurse, |t aattered encracus|y. a|| thrcuqh the Deress|cn |n||uent|a| vc|ces Warned abcut the danqers c|
excess|ve qcvernaent send|nq, and as a resu|t the jcb-creat|cn rcqraas c| the ueW Dea| Were a|Ways |ar tcc saa||, q|ven the deth c| the
s|ua. what the threat c| War d|d Was tc ||na||y s||ence the vc|ces c| ||sca| ccnservat|sa, cen|nq the dccr |cr reccveryWh|ch |s Why i jc|ed
bac| |n the suaaer c| 2011 that What We rea||y need r|qht ncW |s a |a|e threat c| a||en |nvas|cn that |eads tc aass|ve send|nq cn ant|-a||en
de|enses.
uut the essent|a| c|nt |s that What We need tc qet cut c| th|s current deress|cn |s ancther burst c| qcvernaent send|nq.
is |t rea||y that s|a|e wcu|d |t rea||y be that easy uas|ca||y, yes. we dc need tc ta|| abcut the rc|e c| acnetary c||cy, abcut |a||cat|cns
|cr qcvernaent debt, and abcut What aust be dcne tc ensure that the eccncay dcesn't s||de r|qht bac| |ntc deress|cn When the qcvernaent
send|nq stcs. we need tc ta|| abcut Ways tc reduce the cverhanq c| r|vate debt that |s arquab|y at the rcct c| cur s|ua. we a|sc need tc
ta|| abcut |nternat|cna| asects, esec|a||y the ecu||ar tra |urce has created |cr |tse||. A|| c| that W||| be ccvered |ater |n th|s bcc|. uut the
ccre |ns|qhtthat What the Wcr|d needs ncW |s |cr qcvernaents tc ste u the|r send|nq tc qet us cut c| th|s deress|cnW||| reaa|n |ntact.
|nd|nq th|s deress|cn shcu|d be, ccu|d be, a|acst |ncred|b|y easy.
sc Why aren't We dc|nq |t 1c ansWer that uest|cn, We have tc |cc| at scae eccnca|c and, even acre |acrtant, c||t|ca| h|stcry. ||rst,
hcWever, |et's ta|| scae acre abcut the cr|s|s c| 2008, Wh|ch |unqed us |ntc th|s deress|cn.