Wednesday, August 10, 2011


My life is made of Patterns
That can scarcely be controlled. – Paul Simon

As a thought experiment, let’s put the United States and world economies in a hospital setting (Not much a stretch, right?). Now, suppose the disease is pneumonia. Where might this take us?

To begin, let’s take a closer look at the disease pneumonia from the perspective of a pattern that often forms with pneumonia. A person, and a person is really a system, can have pneumonia and recover. In fact, the first time a person contracts pneumonia, say in their mid-50's, recovery is nearly always the outcome. Still, in most cases, there is at least minor, albeit permanent, damage to the lungs. However, this damage doesn’t really compromise the body (system) at all.

Years pass. The person is now in their late 70's or early 80's. Again, he or she contracts pneumonia. Again, the prognosis is good and the patient nearly always recovers. But, as before, some further permanent damage to the lungs occurs. Now, things can start to get interesting because, quite often, the patient gets pneumonia again. And it isn’t twenty or thirty years later. Instead, it is five years later. Again, the patient recovers, but, as before, further permanent damage to the lungs occurs. Not infrequently, this leads to a series of pneumonia infections, with further permanent damage to the lungs and a shortening of the duration between the episodes of pneumonia. Ultimately, the patient dies of pneumonia, even if the patient has another “more serious” disease.

If we take a step back for a moment, and just look at the pattern, what we see is fairly obvious: A system that initially takes a hit, recovers and then, in some instances, takes hit after hit, without full recovery, and with a lessening of the duration between hits. I am going to call this escalating pneumonia. Let me submit this is precisely what we saw back in ‘07, beginning with Bear Stearns, and culminating with the implosion at the end of ‘08. Let me further submit, this is precisely what we are seeing right now in Europe (Forget what’s happening to the US stock market this week (8/1/11 - 8/5/11), this is just a symptom.). Europe is sick with escalating economic pneumonia. There exists a lessening of the duration between incidents of pneumonia and the patient is not really recovering from the last incident of pneumonia before the next incident of pneumonia occurs. This has all the makings of a financial crisis spiraling downward, just like our pneumonia patient. So, if we buy into a pattern analysis of this thing, the course seems set, at least in terms of the disease.

But more exists to disease in these days of modern medicine. There are two other factors: doctors and treatment options. Let’s take a look at these factors.

A few days ago, once again, I saw that famous photograph of Roosevelt, Churchill and Stalin at Yalta. Putting aside issues of morality for a moment, let’s pose a simple question: Were all of these men great leaders? The answer, of course, is yes. In fact, what happens if we broaden the picture and put Hitler, Mussolini and Emperor Hirohito in the picture. The answer remains the same: these too were great leaders (Remember we’ve taken out of the equation morality.). They are vile human beings, but great leaders.

When it comes to politics, and economics, our political leaders are the treating physicians. People like Paul Krugman are the research doctors. The research doctors can scream up and down the hallways of the hospital the best treatment option is such-and-such. But if the treating physician/leader isn’t a great leader, or a stupid leader, and he or she chooses the wrong treatment option, the patient doesn’t get better.

Now let’s pose this question: Is there one single leader in the mix of this economic mess who is a great leader? The answer I come up with is no. Say what you will about the intelligence of Obama, Sarkozy, Merkel or Cameron, I don’t think anyone can reasonably claim these are great leaders. Right now, perhaps, we have only one great leader of an important nation-state and that’s Putin. And Putin doesn’t have a pony in this race. So, from where I am sitting, we have a bad case of escalating economic pneumonia and less than stellar leadership.

Well, even with a bad case of pneumonia, and even a middling doctor, a patient can get better because, even a middling doctor can fumble into the right treatment option. (This is where I have to cheat a bit in terms of the title of this piece, but only a little.) Suppose research doctor Paul Krugman is running up and down the hallways of the hospital and screaming: “This patient is in need of a medication that treats gram-positive bacteria right now.” However, at the same time, research doctor Alan Greenspan is screaming, just as loud: “This patient is in need of a medication that treats gram-negative bacteria right now.” The treating doctor decides to listen to Dr. Greenspan. Unfortunately, the patient has a gram-positive bacteria. So the patient doesn’t get any better. In fact, the patient gets worse.

Of course, the doctor can simply change over to the gram-positive medication and still save the patient. But, what if the doctor has pretty much, out of the box, claimed: “I don’t believe in gram-positive bacteria.” Then, in order for this doctor to properly treat the patient, he or she would have to admit their belief system is flawed and change treatment protocols. Changing a belief system is tough. And, usually, it will take a few dead patients for this doctor to reconsider. Or, let’s say the doctor believes in gram-positive bacteria but, because of hospital politics, the doctor can’t prescribe medications that treat gram-positive bacteria (An example of this is the situation in Europe where, because of the single currency, individual nation-states can’t devalue their currency as a monetary strategy.). This can be an explanation for an action, or inaction, but the patient doesn’t benefit. Or, let’s say the doctor believes in gram-positive treatment medications, hospital politics don’t necessarily rule out gram-positive treatment options but, damn, the hospital pharmacist has a belief system that doesn’t allow the dispensing of gram-positive treatment medications (Hint: Does this sound just a little bit like the Republican Party in the United States Congress?). Again, this can be an explanation for an action, or inaction, but the patient doesn’t benefit. So, at least to me, this looks like a good time to print up the toe-tag for this pneumonia patient.*

Of course, the big difference between our pneumonia patient and the economies in the United States and Europe is the economies are not likely to completely expire. But, the point I am trying to make with the analogy, admittedly forced at times for the purpose of explication, is even if we ignore all the facts and figures, all of the macroeconomic theories, we are still in very dangerous territory. Further, I am suggestion that while all, or nearly all, depressions and deep recessions have a financial collapse at their inception, this is just a symptom. After the financial crisis has run its course, the underlying causative agents remain active until treated.

At the end of the day, or at the end of this day, where I think we are at right now is this: First, the treating doctors don’t even agree on what disease the patient has or the treatment course (And remember, at least for this factor, it is largely irrelevant what the research doctors believe or disbelieve.). Second, the treating doctors have to be objectively right in their diagnosis and treatment course. If they are not, the patient doesn’t get any better and could get worse. If economists like Paul Krugman are correct, we are even farther from this factor than the first factor as, presently, the dominant course of treatment, on both sides of the Atlantic, is short term fiscal austerity, while economists, like Krugman, support short term fiscal stimulus and long term fiscal consolidation (particularly for the United States.). Third, most, if not all, of the obstacles for proper treatment have to be removed. Certainly, this will mean removal of the obstacles to prescribing the correct medication. However, this might also require removal of the current treating physicians, and replacing them with great treating physicians, who are also great leaders, as great leaders are often required for removal of obstinate obstacles. Additionally, as history informs, in situations like we presently have: 1) inadequate leaders; 2) poor policy; and 3) disaffected segments of the population, before great political leaders can do their job, quite frequently, great grass-roots leaders must appear to successfully organize the disaffected. In this regard, concerning the United States, as there exist some similarities between where we are now, and where we were during the Gilded Age, it would be a mistake to summarily conclude the United States won’t need the appearance of grass-roots leaders as part of the recovery process.

So, if you are afraid, you have every right to possess this fear. It seems we have a long way to go before this starts to turn around.


* It bears noting that there is a variant of the gram-positive/gram-negative argument that would apply to the current economic argument in the United States. This variant is where Krugman calls for 20 cc. of a gram-positive antibiotic, Greenspan calls for 10 cc. of a gram-positive antibiotic and the treating physician chooses 10 cc. This is the analogy to choosing an insufficient fiscal stimulus program.

© Copyrighted by James N. Perlman. 2011 All Rights Reserved.