Here's how I think it's going to play out, over the next few months or maybe even years:
1. Thanks to the Power of Magical Thinking (see previous post), most economists, especially the ones now advising our President, are still seeing the world in terms of "free market" dogma. In other words, like Wile E. Coyote, they're still hanging in empty space, off the cliff, not yet brave enough to look down to see for themselves that there is no longer any "there" there. They are thus not yet ready to take the plunge into the new reality that inevitably awaits them (and us). Not only don't they see that the financial system they're straining so hard to preserve is already dead, they also can't see that it is not worth saving even if it could be revived. Their model of a healthy economy is based on "free market" principles now universally understood to be horribly misguided delusions. But the full force of this revelation has not yet sunk in, so they still see the revival of the status quo as not only a worthy goal, but an absolute necessity -- and at all costs. In other words, in their minds they are still on the same horizontal trajectory, despite the fact that there is no longer anything solid beneath their feet whatsoever. This is an extremely dangerous delusion. But the "free market" ideology they've been raised on prevents them from seeing any alternative.
2. In the words of Alan Greenspan, an ideology "is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology." To give Greenspan his due, he's one of the few to actually admit he was wrong. And its extremely important to understand his insight into why he was wrong. An ideology is more than just a set of beliefs, its also a set of blinders that prevents people from seeing beyond the limits of their own worldview -- or to realize that anything at all can even exist beyond those limits. And, as Greenspan so eloquently put it: "The question is whether it is accurate or not." If ones ideology contains flaws but one persists nevertheless in uncritically accepting it, then one is in danger of falling grievously into error: "And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact." (As are a great many others.) It's important, therefore, to realize not only that our political and economic leaders are completely deluded, but that their delusion isn't simply the result of some miscalculations or even wishful thinking, but solidly based in their innermost core beliefs about how the world operates and why. Which means that, no matter how many times they are told by this or that expert that that this or that effort to revive a hopelessly deceased economy is doomed to failure, they will persist in their failure until, as with Greenspan, they are ultimately forced by circumstances to admit that, yes, there was a "flaw" in their thinking. But by then it may be too late.
3. So. What will happen is that governments worldwide will persist in their folly, pouring increasingly alarming billions and trillions of dollars, euros, rubles, whatever, into a financial system whose outrageous debts are a bottomless pit that will never be filled. And to finance this expenditure, while at the same time attempting to stimulate the economy, handle the interest on their national debts, pay the cost of various and sundry wars and other conflicts, and cover the expenses of the various "entitlement" programs that form the basis of their social safety nets, they will need to print humungous amounts of money, far beyond anything attempted in the past, beyond Weimar Germany, beyond Zimbabwe.
4. For a while this strategy will appear to be working. "Toxic" debts will be paid, investment bubbles will be re-inflated, jobs will be created, mortgages will be paid, wars will be fought, entitlement programs will flourish, etc. While major creditors such as the Arab oil sheiks, the Chinese, etc. will be unhappy about the diluting of their enormous Treasuries investments, thanks to inflation on overdrive, they will have little choice in the matter, due to a variation on a principle known as MAD, or Mutual Assured Destruction. If they were to call in their loans, demanding their money back, then the whole fabric of the financial universe would dissolve before their eyes, and their money would be not only worthless but meaningless. So they will have no other choice but to opt for "peaceful co-existence" by looking the other way, biting the bullet, and continuing to export product to an ever more "affluent," continually "reviving" consumer market in the West.
5. Strangely enough, such an arrangement, as zany as it might sound, actually could work -- so long as everyone involved agreed to let it work. In other words, so long as Wile E. Coyote refuses to look down, his boundless "confidence" could in principle keep him afloat indefinitely. This is in fact the basic principle behind what could be called the "Infinite Ponzi Scheme." What's important to realize is that such a scheme can work simply because what is possible in the real world need not depend on money at all. Money is simply paper. Whether it holds its value or continues to decline in value is of no intrinsic importance whatsoever. As Einstein once noted, an astronaut accelerating in free fall would, like our coyote friend, feel nothing unusual. Until landing, of course.
To be continued . . .