Essays On Depression Economics

By Pira Saravanamuthu

Preface

I wrote this collection of essays between August and December 2010. I am grateful to Dr Sui Phin Kon and Dr Catherine Bryant for granting me leave during those months.

Pira Saravanamuthu

August 2011

Contents

Page

Introduction 3

Part I: The Great Depression 7

Act I: The Origin of the Great Depression 9

Act II: The Old Order Collapses 11

Act III: FDR Become President of these United States 13

Act IV: A Gathering Storm 15

Act V: WWII Ends the Economic Depression 17

Part II: The Return of Depression Economics 19

Depression Economics Is Here 21

Liquidity Traps Cause Economic Depressions 25

Government Debt Can Help Solve Private Sector Debt Problem 31

Economics Is A Discipline in Disarray 35

Introduction

Economic Depressions occur once every three generations

Economic depressions occur infrequently. The previous big economic depressions occurred in 1825, 1873, and 1929. The financial crisis of 2008 was of the same order of magnitude as the crises that caused the previous depressions. As it tends to be rare, most academic economists have not spent any time studying economic depression. They have chosen to treat those data points as weird outliers – rather than a subject in its own right.

A notable exception was Paul Krugman. He is a very distinguished professor of economics at Princeton University. He won the Nobel Prize in Economics in 2008 for his earlier work on international trade theory in the 1980s. He is probably the most gifted economist alive.

This collection of essays is based on his academic research on depression economics. Over a decade ago he became convinced that economic depressions could happen anywhere. He had observed Japan’s descent into an economic depression in the 1990s with great alarm.

Economic depressions probably occur once every three generations because that is how long it takes for the general public, policy makers and academic economists to forget the

hard-learned lessons of depression economics. Paul Krugman despairs at the current state of economics:

“The result was what I’ve called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 1930s and 1940s – and, of course, went into spasms of rage when their ignorance was pointed out.”

Paul Krugman believes that this human propensity to forget hard-learned lessons means that we were doomed to live through a big economic crisis like the current one:

“Watching the failure of policy over the past three years, I find myself believing, more and more, that this failure has deep roots – that we were in some sense doomed to go through this.”

The References

This collection of essays is also based on the work of the following economists: Brad DeLong, Nouriel Roubini, Richard Koo, Hayman Minsky, Paul Samuelson, John Maynard Keynes and Jean-Baptiste Say. In order to keep the essays short I have not referenced each economist individually.

This book has been divided into two parts. In the first part of the book I will give a descriptive account of the Great

Depression (1929 – 1933). The Great Depression was a defining moment in economics when a lot of things became clear. The political consequences of the Great Depression were cataclysmic. In the second part of the book I will give a theoretical account of depression economics. I will also outline how we can end economic depressions.

Part I: The Great Depression

Act I: The Origins of the Great Depression 

World War I ended in 1918.  America experienced a post war economic boom in the 1920s.  After a slow start Europe too enjoyed an economic boom in the 1920s. 

The Bubble inflates 

In the United States the stock market kept rising rapidly through the 1920s.  This is shown in the graph above. Many people thought that this was a great way to make a quick profit.  So people borrowed money to buy shares.  This pushed up the value of shares even more.  This meant that banks could lend even more money against rising share prices. This was a classic credit-and-asset bubble. 

 The banks reasoned: “What is the worst that can happen: the customer defaults on the loan.  Well no problem - we can always sell the shares and get our money back.”  (There was an almost exact replay in the 2000s with property playing the role of shares.) 

The illiquidity and insolvency kick in

When there was a slowdown in economic activity in 1929, share prices fell.  As a result many speculators became insolvent.  When many banks rushed to sell their shares at the same time, the share price crashed even more.  And so the banks become insolvent.  As people began to suspect that banks might be insolvent they rushed to take their money out of the banks.  (There was no deposit insurance.)  There was a series of devastating bank runs across the continental United States.  Europe was caught up as collateral damage.  Several big European banks failed. The combination of illiquidity and insolvency resulted in a collapse in global economic activity and trade.  And all this was merely Act I of the Great Depression.

Act II: The Old Order Collapses

Since the 18th century, liberalism had been the dominant political philosophy.  Liberalism had just about survived World War I.  It would not survive the Great Depression.  The Great Depression led to a massive collapse in economic activity.  There was mass suffering as unemployment soared to above 25% in both Europe and America.  None of the old political parties seemed to be able to end the economic hardship.  In desperation, people began to turn away from liberal political parties. The most spectacular failure of liberalism took place in Germany and Japan. Germany was hit badly by the Great Depression.  Families were reduced to feeding their children Vaseline as they could not afford food.  As a result there was a rise in support for the Nazi party.  By 1933, Adolf Hitler had become Germany’s leader. 

In Japan, the assassination of the moderate Prime Minister Inukai Tzuyoshi, in 1932, ended civilian control of the government.  Extremist generals took over the running of the government.  They began a series of brutal conquests in East Asia. Democracy survived elsewhere.  However, economic liberalism did not survive.  Countries severely restricted trade.  Even America’s faith in the market economy was shaken badly.  America passed the Smoot-Hawley act in 1930 severely restricting imports into the United States. These acts made the Great Depression even more severe. By 1933 the old liberal order had been swept away.  Economic freedom was restricted most places.  And in some countries very dangerous governments were in charge. The era of liberalism had come to an end.

Act III: Franklin Delano Roosevelt becomes President of these United States

 

Defeated Herbert Hoover (left) with Franklin Roosevelt (right) in 1933

A man of incredible wisdom became president of the United States in 1933.  He would correct many of the wrongs in the world over the next decade and a half.  But first he had to end the Great Depression in the America.

The Republican ideas of free enterprise had been thoroughly discredited by the Great Depression.  Roosevelt (FDR) had the mandate to engage in activist government. His policies were seen as wildly radical at the time.  His policies can be divided into three: 

Social protectionThe Federal and state governments worked together to provide unemployment benefits to jobless people.  The Social Security Act provided pensions to elderly people. 

  Public worksThe Federal government hired millions of people to build dams, roads and national parks.

  Financial policyFDR declared a Bank Holiday to stop the bank runs.  He then instituted deposit insurance. He also separated the risky investment banks from regular high street banks.  The financial sector was heavily regulated to prevent the speculative excesses of the past. 

 Taken together these policies led to a significant improvement in the economic environment. FDR's policies had made the depression tolerable. However, economy was still functioning at well below potential

Act IV: A Gathering Storm

President Roosevelt’s policies did not end the economic depression.  This is because his spending plans were never quite big enough.  If he had spent more money on public works (like building roads) he could have ended the depression.  Even a radical like President Roosevelt did not run big government deficits.  In 1937 unemployment was still 14%. 

Public opinion was also turning against government spending.  In 1938, 63% of Americans were against increasing government spending.  And so President Roosevelt reduced government spending.  As a result unemployment began to rise again.  The unemployment rate in 1939 was 17%. The American economy had been in a depression for a whole decade.  

It seemed that this depression would go on forever and ever.

Meanwhile the rest of the world prepares for war

Hitler began re-arming Germany as soon as he became leader.  He was determined to conquer Europe militarily.  Hitler coerced Austria into joining Germany in 1938.  He invaded Czechoslovakia later that year.  Britain and France made it clear that they would declare war if Germany invaded any other country.  Hitler was preparing to invade Poland in 1939.

Japan had been conquering the Chinese mainland throughout the 1930s.  Japanese troops committed terrible war crimes in their conquest of China.  An exasperated Britain and America (a major power in the Pacific) banned the sale of oil to Japan.  The Japanese generals were incandescent.

Act V: World War II Ends the Economic Depression

The American government spent $30 trillion (in today’s money) to fight WWII.

The resulting economic boom laid the foundation for long term prosperity.

Paul Krugman: Depression was ended by “accident”.

Adolf Hitler invaded Poland in 1939.  Britain and France declared war on Germany.  Germany quickly defeated France.  Germany then invaded Russia in 1941.  The Japanese generals lashed out at America by bombing Pearl Harbour in 1941.  And thus every major country got dragged into World War II.

President Roosevelt quickly mobilised the United States to fight a world war.  The US Army quickly mopped up able-bodied men.  Women went to work in war factories.  Unemployment collapsed.  

Fiscal and monetary policy: Together at last!!!

The American government financed the war by ending central bank independence.  The Federal Reserve was told, as it was wartime, it would have to help finance the war.  The Federal Reserve printed money and bought both short and long term government bonds to make sure that the interest rates on those bonds stayed low.

The government spent this freshly printed money to build ships, planes and tanks.  This drove up the rate of inflation.  So the government then had to impose price controls to stop prices from rising too quickly.  This was a nice change from the depression when prices kept falling.

Officials in Washington decided what the factories were going to produce and how much everyone was going to be paid. In short America became a semi-command economy.

The massive government spending and high inflation finally ended the economic depression.

Part II: The Return of Depression Economics

Paul Krugman accepting the Nobel Prize in Economics in 2008

Depression Economics Is Here

Long periods of economic stability (like the 20 years before the current crisis) make people complacent about financial risks.  As a result, people take on more and more debt.  However, one day everyone collectively realises that they have too much debt. This is the Minsky moment.  In the current crises the fall in house prices was the immediate trigger for the Minsky moment.  Suddenly, borrowers find that they are not able to re-finance.  And so everyone is forced to pay back debt quickly.  What the borrowers do next is what turns a financial problem into an economy-wide depression.

Borrowers have to save money in order to pay back their debts.  When all the borrowers cut spending and save cash, the velocity of money collapses (please see graph above).  Demand in the economy collapses as goods and services go unsold as borrowers try to save money in order to pay back their debts. 

Unfortunately, the collapse in the velocity of money - and the fall in sales - creates a devastating downward spiral.

The fall in the velocity of money – and the accompanying fall in sales in the economy – makes it very difficult for borrowers to earn the money that they need to save, in order to pay back their debt.   And hence their debt problem becomes even more severe. This is what John Maynard Keynes called the 'paradox of thrift'.

The only way to break this vicious downward spiral is for the government to borrow money and then buy the goods and services that the private sector has stopped buying.  This will push the velocity of money back up to a more normal level and hence make it easier for borrowers earn money, in order to pay back their debts. 

In short: the only way the private sector can get out of debt quickly is if the government becomes a very big borrower and spender of last resort. If the government refuses to run a big budget deficit then the private sector's debt problems will get worse.  The velocity of money will stay low and the economy will function at well below potential.  Both the high debt and high unemployment will persist for 10 to 20 years.

This is exactly what happened in the Great Depression (please see the graph overleaf).  As the private sector desperately tried to pay back debt from 1929 to1933 (represented by the slight fall in the blue line), debt as a percentage of GDP soared (red line).  This is because the collapse in the velocity of money caused economic output to collapse. The economic depression persisted for a decade.

Then in 1941 America entered World War II.  The American government borrowed and spent $ 30 trillion dollars (in today’s money) to fight World War II.   The soaring debt (blue line) and war spending pushed up the velocity of money and resulted in a massive economic boom.  Debt as percentage of GDP collapsed (red line).

This massive debt is what laid the foundation for three generations of American prosperity after World War II. Please note how the blue and red lines always move in the opposite direction. This result is very counter intuitive.

The moral is that it is impossible for everyone to get out of debt at the same time.

Liquidity Traps Cause Economic Depressions

Mild economic downturns

As we have seen economic downturns are usually caused by a fall in the velocity of money. The severity of the fall in the velocity of money depends on the soundness of the underlying assets in the economy. Usually the assets in the economy are sound and so fall in the velocity of money is mild. As a result most economic downturns are mild.

Normally the central bank is able to end an economic downturn by pushing the velocity of money back up to a more normal level. The central bank restores the velocity of money is by increasing the amount of money in circulation. The central bank does this by cutting the short-term interest rate. To be clear: the central bank cutting the short-term interest rate is the same thing as the central bank temporarily increasing the amount of money in circulation.

Insolvency causes liquidity traps

However, after a big financial crisis the fall in the velocity of money is severe. This is because a steep fall in asset prices pushes many people and institutions into insolvency. They are then forced to save a lot of money from their cash flow in a desperate attempt to become solvent again.

This strong desire by people and institutions to hold onto cash (and cash substitutes) causes a big fall in the velocity of money. This situation is called a liquidity trap.

Liquidity traps are the cause of economic depressions.

Temporary v permanent increases in the money supply We can now understand why the central bank is not able to increase the velocity of money during a liquidity trap. Temporary increases in the money supply will not tempt people to spend money because they know what they need is a permanent injection of cash (ie a recapitalization) to become solvent again. In order for temporary increases in the money supply to produce an increase in economic output, the intuitions in the economy have to be solvent in the first place.

If the institutions in the economy are insolvent the central bank can increase the short-term money supply all it likes but it will not be able restore the velocity of money. This is why record low short-term interest rates in Europe and America have not produced a significant economic recovery.

In other words, during a liquidity trap, the fall in the velocity of the money is so great that even pushing short-term interest rates to zero percent is not sufficient to restore the velocity of money. This loss of control by the central bank is what differentiates a depression from a recession.

Paul Samuelson was the greatest economist of the 20th century. He has written one of the best explanations of what happens in a liquidity trap. This is what he wrote in his classic 1948 economics textbook:

“‘You can lead a horse to water, but you can’t make him drink.’ You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs.”

During Japan’s long depression in the 1990s, the Bank of Japan massively increased the money supply (please see blue line in the graph below). However the velocity of money as represented by the red line stayed the same:

Source: Bank of Japan

All of the increase in increase in the money supply stayed in bank reserves and was not actually spent on buying real goods and services. This occurred because the Japanese banks were insolvent. As a result, the insolvent banks were hording money rather than lending it out. In order the restore the velocity of money people and institutions must be made solvent again.

Negative interest rates will make everyone solvent again

During a liquidity trap, the central bank needs to achieve negative rates of interest in order to achieve normal economic activity.  Goldman Sachs, an investment bank, calculated that the Federal Reserve would need to achieve -6% to get back to full employment.  The graph below shows the actual interests rates against what the interest rates should be according to the Taylor rule (to achieve normal economic activity).

Source: Goldman Sachs

 Obviously interest rates can’t go below zero in real life and this is the problem.  This is the liquidity trap.

Inflation is the solution

What the central bank can do is push the whole Y-axis up in the graph above.   It would in effect be saying: “We will make sure that all prices move into the positive territory in the future”.  The central bank can achieve this by permanently increasing the money supply.  Permanently increasing the money supply is the same thing as creating inflation. This move will also make everyone solvent again because the insolvent institutions would have received the permanent injection of money that they crave.

However generating inflation during a liquidity crisis is difficult. As we have seen, during a liquidity trap it is difficult for a central bank to increasing the velocity of money – which is critical to generating inflation. It is difficult but not impossible. Liquidity traps do not last forever, and this allows central banks a way to create inflation.

The central bank can generate inflation for the present moment by promising to increase the money supply in the future. By clearly signaling that it will allow a high rate of inflation in the post liquidity trap world, it will actually end the liquidity trap itself. This is because people will not want to hold cash if they

know it is going to lose value in the future. People stopping hording cash and spending cash will end the liquidity trap.

The Key Insight

We can summarise the link between negative interest rates and inflation as:

Negative interest rate = Permanent increase in the money supply = Inflation

And inflation is helpful during a liquidity trap because it will restore solvency to people and institutions.

                      InflationInsolvency -------------------> Solvency

However, central banks strongly dislike inflation

A number of factors mean that central banks find it impossible to promise a higher rate of inflation. Many central banks are mandated by law to maintain a low rate of inflation. Most central bankers think that the whole point of their job is guard against inflation. So both culturally and legally it is very difficult for them to accept inflation as a solution – even if they could somehow overcome the technical difficulties of generating inflation during a liquidity trap.

Likewise, many economists instinctively dislike inflation. In 1998, Paul Krugman first proposed inflation as a solution to

Japan’s depression. Many academic economists reacted with outrage to his paper. Paul Krugman recalls:

“Back in 1998 I argued that the Bank of Japan needed to find a way to ‘credibly promise to be irresponsible.’ That didn’t go down too well, but it was what sober, careful economic analysis prescribed.”

Many economists now accept Paul Krugman’s point that inflation will help end a liquidity trap. For instance, Ben Bernanke was Chairman of Princeton University’s Economics department until 2002. He is a very distinguished monetary scholar. This is what he wrote in a paper in 1999:

“Krugman (1999) and others have suggested that the Bank of Japan quantify its objectives by announcing an inflation target, and further it be a fairly high target.  I agree that this approach would be helpful, in that it would give private decision making more information about the objectives of monetary policy.  In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the Bank of Japan is intent on moving safely from a deflationary regime.”

It’s all up to government spending now

However, given all the prejudices against inflation no one will actually implement this policy. Bern Bernanke is currently the

head of America’s central bank, the Federal Reserve. In his new role he has changed his position on inflation. He has succumbed to peer pressure at the Federal Reserve and he has categorically ruled out inflation as a way of ending the liquidity trap. As a result we are going to have to rely on government spending to store the velocity of money and so end the liquidity trap.

And policy on this front is looking just as dismal.

Government debt can help solve aprivate sector debt problem

The American government has a much bigger ability to borrow money than the private sector.  A new paper shows that by using its big credit card wisely the American government can help ease the debt burden for the country as a whole.

Economists have a poor understanding of how different types of debt behave during big economic crises.  To try and improve our understanding of debt, Paul Krugman has spent the last few months rethinking the debt problem.

Paul Krugman has published his findings about debt in a formal academic paper with Gauti Eggertsson, an official at the Federal Reserve. Their key finding is that by running big budget deficits, the American government will massively increase economic activity and so enable the private sector to get out of debt quickly:

“In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.”

They go onto say:

“And yes, this analysis does suggest that the current conventional wisdom about what policymakers should be doing is almost completely wrong.”

The private sector and the American government face completely different constraints during a financial crisis. We can measure the difference in the constraints each faces by looking at the interest rates on their debts.  The interest rates on private sector debt soars, whilst those on safe government debt collapses.  By borrowing and spending money, the American government is in a position to keep economic output rising.  In a growing economy private firms will find it much easier to trade their way out of debt.

But won't large budget deficits lead to bankruptcy of the state?  The answer to that question depends on whether the country in question is safe or risky borrower. 

The safe borrowers

Safe borrowers like UK and US have been honouring their debts for several centuries.  Their governments can raise taxes

from very big economies. In the past, the US government has issued debt on a massive scale during times of national crisis (please see graph above) without any significant problems.  Based purely on economic grounds, it is difficult for the UK and US governments to default on their debt - as both governments can ultimately print money to pay back their debts.  However, as we will see later, the American political system seems determined to ruin the well functioning government debt market. 

The bond market does not think that UK and US are borrowing beyond their means.  The interest rate on UK and US bonds just keeps hitting record lows as demand for safe government debt soars.  Unfortunately, neither government plans to take advantage of these record-low rates of interest and provide much needed stimulus to their economies.   Democratic governments only seem to be able to find the political will to run large deficits during big wars.

 The risky borrowers

Risky borrowers are small countries like Greece and Ireland.  Not only are they small, they have also given up the right to print money by joining the Euro.  For them defaulting on their debts and leaving the Euro becomes ever more attractive every passing day.  Iceland, which defaulted on its debts and underwent a massive currency devaluation, is now on the road to recovery. 

The American political system nears breaking point

The Republican Party has stood in firm opposition to President Obama for the last 2 years and it will take control of the lower house of Congress in January 2011.  Some Republicans are talking openly about a "government shutdown". The Republican Party may decide to take its opposition to President Obama all the way and refuse to pass a budget next year.  That would result in a government shutdown and create a mega-mega crisis.  However, the dysfunctionality of the American political system is a subject for another day.

Economics Is A Discipline In Disarray

Liquidity traps cause demand failure

Normally economics is concerned with the allocation of scarce resources. The question is: “How do we ‘economise’ effectively?” As a result economists are very comfortable thinking about supply side problems.

However, during an economic depression supply is not the main problem. President Roosevelt has explained this most clearly in his inaugural address in 1933 (at the height of the Great Depression):

“And yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils with which our forefathers conquered because they believed and were not afraid, we have much to be thankful for. Nature still offers her bounty and human efforts have multiplied. Plenty is at our door stop but a generous use of it languishes within the very sight of supply.”

What President Roosevelt is describing vividly is a demand failure. Liquidity traps cause people to horde money and stop them from engaging in the purchase of real goods and assets. Demand failure is not an easy concept. Paul Krugman says that

many academic economists struggle to understand demand failure:

“Many economists these days reject out of hand the Keynesian model, preferring to believe that a fall in supply rather than a fall in demand is what causes recessions.”

Demand failure is counter-intuitive, rather like Quantum mechanics. (Quantum mechanics is the study of particles at the level of electrons.) Fortunately, in quantum mechanics we can run repeated experiments until people actually believe the strange results. Unfortunately, this is not possible in economics. As we are not able to run controlled experiments in economics it is difficult to settle these arguments over counter-intuitive conclusions.

In the aftermath of the Great Depression the economic profession did believe in demand failure. Paul Samuelson was the best economist of the 20th century. He invented modern economics as we know it today. He wrote the first modern economic textbook (in 1948) which educated two generations of American undergraduates. As Paul Krugman explains, Paul Samuelson was a firm believer in demand failure:

“Samuelson 1948 would have said to provide a stimulus big enough to restore full employment — full stop. So what we have here isn’t really a lack of a workable analytical framework. The disaster we’re facing is the

result of the refusal of economists, both in and out of the corridors of power, to go with the perfectly good framework we already had.”

Supply vs demand

Paul Samuelson’s approach to economics was very successful because he carefully balanced supply and demand. This was the moderate Samuelsonian synthesis of economics. However, this moderate approach did not survive the hyper-specialisation of American academia. By the 1980s the Great Depression was a distant memory. All of the academic prestige was in solving supply-side problems. The most cutting-edge economists carefully unlearnt and rejected the demand-side lessons of Samuelson 1948. As Paul Krugman explains:

“If economists seem totally at sea, it’s because they have carefully unlearnt the old wisdom. If policy has failed, it is because policy makers chose not to believe their own models”

In theory ending depressions caused by demand failure is really easy. The government just needs to keep printing and spending money until the unemployment falls back to a normal level. However, in practice government officials find it very difficult to implement this policy for two reasons.

Firstly, government officials can’t believe that the solution to such a complicated problem could be this easy. For instance, one of President Roosevelt’s advisors suggested to him that printing money might end the Great Depression. Roosevelt is said to have replied, “too easy.”

Secondly, the political system has built in roadblocks that prevent radical policies from being undertaken. Central bank independence and requirements to balance the government budget are usually principles of good government. However during a liquidity trap these policies become a major handicap.

World War II ended the Great Depression because government officials finally stopped worrying about the principles of good government and focused on winning the war. The American government printed and spent money until it won the war.

Lost decade here we come

What we need to end the current economic crisis is a large and sustained monetary and fiscal stimulus:

1. An inflation rate of 5% for 5 years combined with2. Increasing government spending by 5% per year for 5

years.

Even with these two policies in place it will probably take around 5 years to reduce the private sector debt burden to a safe level and so end the liquidity trap. However, judging by the rhetoric of most politicians and central bankers, the above is combination is a non-starter. In their eyes, you cannot be a serious person if you are proposing those solutions.

This means that we will have to wait for the liquidity trap to end of its own accord. The liquidity trap will probably persist well into the latter part of this decade. The Japanese economy has been in depression for 20 years. The depression after 1929 lasted over a decade and was only brought to an end by World

War II. The politicians who complain about wasteful government spending in the middle of a liquidity trap should remind themselves that it took world war to end the Great Depression. What could be more wasteful than a world war?

Why will the liquidity trap end eventually? Houses and cars do not last forever. People will have to eventually buy new houses and buy new cars. In other words, demand will return eventually. It is a shame that a country’s economic future should be determined by the rate at which its capital stock degrades. In the meantime there will high unemployment and high debt in the economy.

The instability of moderation

Economics as a discipline was supposed to prevent all this unnecessary suffering. If the vast majority of the economic profession had been behind the high inflation and high government spending plan then the politicians and central bankers could have been forced down this path by the sheer collective force of their arguments.

Instead, when the crisis arrived, the economic profession descended into disarray. In the essay “The Instability of Moderation” this is how Paul Krugman describes our current plight:

“Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

“And by the time the time that big shock arrived, the descent into the Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree a wider response.

“In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us.”