Let's look at it through Krugman-the-liar's lens:
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later.
Actually, that's a fairly accurate quote, if multiple sources can be believed.
Note very carefully, however: Hoover refused the advice.
And that, my friends, is what Krugman "forgot" (intentionally) to tell you.
The refusal of Hoover to take Mellon's advice is particularly stark. That's because Hoover, serving at the time as Commerce Secretary to Warren Harding following his election in 1920 during the worst of the deflationary depression (which began under Wilson), counseled substantial intervention by the Federal Government to prevent business failures, prop up local governments through public works projects and similar "management" of the economic cycle.
That is, Hoover believed in "too big to fail" and "federal intervention" to bail out the bankrupt.
President Harding refused his advice.
A decade later Hoover was to be in a position to actually act on his counsel. Yes, Mellon did advise the liquidation of bad debts - no matter where they were found. But Hoover refused to listen to Mellon, and between he and FDR engaged in what was, up until 2007, unprecedented interference in the clearance of bad debts and the refusal to allow those were in fact bankrupted by their own acts to fail.
Mellon had good reason to give the advice he proffered: It had worked just a decade earlier; the sharp deflationary depression of 1920/21 was over in less than 18 months, and the economy came roaring back.
Of course Mr. Krugman doesn't bother to mention that, and if you had a government "education" you probably didn't learn these things. You could, of course, look directly to source documents such as Congressional speeches and other similar actions (like, for instance, what laws were actually passed - or not - during those years and what they did) but most people don't. They just read an article like Krugman's and take from it that what he claimed occurred - the exact opposite of the factual record - was undertaken in the 1930s.
In short, Mellonism is as wrong now as it was fourscore years ago.
Mellonism wasn't undertaken in 1930. That's a lie. In point of fact the very position you espouse was what was done in 1930 forward. That response led to the expansion of the Depression and failed to produce recovery. It failed for more than a decade.
The American people deserve better than this sort of intentionally-dishonest "journalism."
The unfortunate fact is that the Mellon view was ignored in 2000. There we had the very same choice, and decided to try to kick the can instead of facing the fact that we had built infrastructure and false demand for which we could not pay. We decided to enact as policy, pushed forward by Greenspan and Bush, to "stimulate" through debt.
Have a look for yourself. No part of this was sustainable and none of it is today. In order to sustain this growth path for debt we would have to post a compound growth GDP growth rate of more than 7% each and every year.
We haven't and we won't. In point of fact we haven't seen a nominal GDP growth rate for one single year over 7% since 1989. The actual compound level of growth since 1990 forward is 4.86%, or more than two full percentage points short of what's necessary to make these debt levels sustainable. From 2000 forward, that growth rate has been 4.16%.
This sounds like a small deficit. It is not. At 4.16% GDP grows just 50.3% over a decade. At 7% it grows 97% over the same time period. That "small" less-than-three-percent difference turns into a monstrous 50% deficit against debt growth over ten years.
Krugman's philosophy, along with the rest of the so-called "mainstream" in economic thought, is that somehow this doesn't matter, or that we must disregard it. But their theories have been proved bankrupt through more than two decades of continuous experience. The often-repeated claim that Clinton ran a "surplus" and thus this was a viable option is not only intentionally false (he stole the Social Security surplus to make his deficits "disappear") but it masks the monstrous growth in debt that occurred in the 1990s in business, financial and mortgage credit, producing the market bubble of that era.
Ireland has been told it "must" implement a property tax, and it "must" bail out the banks, lest there be "ruinous" consequences. But what are those "ruinous" consequences?
Well, should the government refuse to do this and force private lenders to eat their own cooking, they might cease lending in the future. That, of course, would mean that the government and private industry would have to live within its means.
Is this terrible? That's a fair question and one that we should ask in the converse:
Is it possible to perpetually live beyond your means via piling on more and more debt?
That is, those who propose that we should not balance the budget today must be asked to justify exactly when they will support that path, how they will get there, and what guarantee they'll offer that it will actually happen. They must also have demanded of them some evidence that in the time between "now" and that point they will be able to continue on their present course of action without interruption.
If all of those elements, most-particularly the last, cannot be met then we must instead choose to take our medicine now and slash the budget, telling those who claim to be "too big to fail" and not only are they not in that club any more, they're also not too big to jail.
If this results in the cutting up of our collective credit card, then so be it. Yes, that results in much pain. But we have a model for this - 1920-21, in which Warren Harding did exactly that and the economy, while suffering an extremely sharp deflationary recession cleared and rebounded smartly within 18 months.
How far are we into our Depression now?
Three years.
For more than three years our government has spent more than 10% of GDP. Our real GDP growth rate has been negative since 2007 - sequentially - when one removes artificial government stimulus. In 2008, the contraction was about 8%. The contraction in 2009 and 2010 was over 10% and about 7.5%, respectively. That is a 28% contraction top-to-bottom thus far, which dramatically exceeds the economist definition of "Depression", a 10% cumulative decline.
The problem with the path we are on now can be seen in that chart. In 2000, following the meltdown of the Internet Bubble, you can see the same policy response. In 2001 onward government "stimulated" via borrow-and-spend to try to pull the economy out of its funk. They failed - we never recovered in real terms, we never saw even a 2% adjusted growth rate again.
This is why the debt bubble hit the wall. We failed not only to put up actual 7% GDP increase numbers that were necessary, but we faked the numbers we did put up with government borrowing. That borrowing, however, was not supported by actual output.
The path we are on cannot work. It is mathematically impossible for success to occur. We are seeing that impossibility play out in nation after nation, beginning with Iceland, Greece and now Ireland. This cancer will spread unless we excise it.
Excising it means telling the bankers to go stuff it, and refusing to pay. It means governments doing so where necessary - ceasing borrowing and running a primary surplus. It means governments refusing to backstop bad debts and allowing those who are bankrupt to be recognized as bankrupt, forcing their bad debts into the open and liquidating them. It means spending less than you make personally and spending less than you tax as a government, actually paying down debts.
We cannot continue on the path we are on. We have over $100 trillion in actual liabilities in the Federal Government when one looks not only at public marketable debt but also the forward promises for Medicare, Medicaid and Social Security. This exceeds the net worth of households and corporations by some 40%. That is, it's not possible for us to pay, even if government was to confiscate all privately-held wealth. We would still be in the hole by nearly half.
That which cannot be paid will not be paid. This is not a matter of opinion or politics, it is mathematics. Mathematics does not care about the political landscape or whether you are Democrat, Republican or Martian. The only truth in Mathematics is that all equations balance - always. That which is on the left side will balance that which is on the right. If you have on the left (debt) that which exceeds what is on the right (assets), and production cannot possibly all be diverted to pay the left, then some part of that debt will default.
We choose only how long we would like to pretend, and while doing so the balance shifts ever-more-unfavorably against us.
We must do the right thing, no matter how painful or distasteful it might be.
There is no alternative - we choose only between taking those steps on our own initiative today or having them grow and become worse tomorrow.
In 2000 the total contraction in GDP necessary to clear the system was approximately 10%. Today, it is in excess of 30%. If we continue on the path we are now on through "one more cycle" we will reach the point that Ireland is in, where banks will be demanding bailouts of over two and a half trillion dollars - just as occurred last week in Ireland.
Remember too - the Irish demand for more bailouts as a result of these "stress tests" came just one year after the banks there were all declared "healthy" through the previous round of stress testing.
This is what a debt spiral does; the black hole of ever-compounding obligations swallows your ability to pay and, unsatisfied, demands ever-larger capital injections until quite-literally the entire wealth of your nation is consumed - or you tell the banksters to pound sand.
