Felix Zulauf says the die is cast. Is it?

I was just looking at Barry Ritholtz’s synopsis of Felix Zulauf’s observations from an in-office interview Barry had with him and I have to say I agree with the man 100%.

But is the die cast? Are we headed into something much worse? I was thinking about just this question earlier today. So let me say a few words and send you off to Barry’s site to read the bullet points from that discussion with Felix Zulauf. I’ll put up a chronology of the posts I think represent the best framing of my ideas at the end of the post.

When it comes to global macro, I think Felix Zulauf and Ray Dalio are the analysts most aligned with my world view. As some of you may know, I come at the macro causes of this debt crisis from an Austrian perspective. I set out the framework when I started the blog in my third post called “The US Economy 2008”.

The gist of it is that we have had a secular run up in credit creation due in large part to the inflationary policies of the Federal Reserve. The Fed would intervene in the economy during downturns to prop up asset markets upon which US households depended due to stagnant incomes. This allowed the financial sector to grow ever larger as the assets collateralising debts increased. Eventually, this form of policy intervention hit the wall when rates dropped to zero percent. The Fed has tried desperately to intervene and prop up asset prices artificially through unconventional monetary policy. But it has been largely unsuccessful.

In late 2008, I wrote a trilogy of posts about economic depression and government intervention that formally marked the beginning of my support for preventing a second Great Depression. Here they are: “Confessions of an Austrian economist”, “What does Mises say about trying to stimulate the economy out of recession”, and "A brief philosophical argument about the role of government, stimulus and recession”. The posts were an argument in favour of not avoiding recession but of avoiding depression. As Felix Zulauf says according to Barry’s piece:

There was a window for an Austrian economics solution, but that opportunity has passed. Worse still, imposing Austrian economics on weak countries here and now will only make the situation worse, causing a recession or making any contraction worse.

As I very recently explained about avoiding recession:

The Austrian in me says avoiding recessions eventually leads to crisis through the build-up of macro disequilibria. Back in 2008, I did a few charts which showed how distorted the US economy had become. New home sales were way over the top as was the real increase in house prices. US debt, was through the rough along with the current account deficit. And the savings rate absolutely plummeted while household debt climbed.  There were some serious macro disequilibria


Avoiding recession and avoiding depression are two different things. In a panic, the economy is in disequilibrium. Market crashes, property crashes, bankruptcies, and bank runs can lead to some serious knock-on effects and dead-weight economic loss, especially when the downturn is global. The Keynesian in me says debt deflation and depression are the result of this disequilibrium. Obviously you want to prevent moral hazard by letting truly bankrupt enterprises fail. To me, it’s all about the credit writedowns. My view is that until these failures occur and until creditors write down unpayable debts, debtors can only be sustained through gambling on greater income from more debt as an out. You are just papering over the situation and storing up more problems for later.  The point of Keynes is to have government work counter cyclically as it should since the sector balances mirror each other (non-government surplus equals government deficit). You only exaggerate business cycles through pro-cyclicality otherwise. As Felix Zulauf recently pointed out, cutting government into the teeth of recession makes a debt deflation and crisis more likely.

Moreover, I believe that, in the absence of stimulus, the present global crisis would be much more severe. In fact, it could threaten systemic collapse and a Great Depression — if allowed to continue without some measure of countervailing monetary and fiscal stimulus. Not everyone agrees with this view. Some believe that the economy is self-equilibrating, meaning that the ship will eventually right itself once you “purge the rottenness out of the system”, as Andrew Mellon is reputed to have said.

I wrote a lengthy post dedicated to this theme. My prediction was that a “collective debt reduction across a wide swathe of countries cannot occur indefinitely under smooth glide-path scenarios”. I said trying to cut government and private sector debt at the same time would be the origins of the next crisis.

I have to be honest, sometime in 2009 after The Fake Recovery was engineered, I came to the view that Felix Zulauf has about the inevitability of this crisis. This is what I was thinking about earlier today. The question I was asking myself had a lot to do with the tension between hope and expectations, and between policy advocacy and prognostication. I like to be optimistic without losing view of reality. My tack has been to hope for the best, prepare for the worst and expect something in between. This creates a tension for me in my writing because, depending upon whether I am expressing my hope and advocating a policy or expressing my expectations and making a prediction, you can get two different views. The aspirational advocacy pieces are fewer these days (since I wrote that they would be last year). Today, I write in more in terms of crisis policy paths and potential outcomes based on those.

Overall, my sense is that policy makers are too wedded to the status quo until the system collapses. For example, Franklin Roosevelt was not prepared to deliver a radical agenda in 1932. He campaigned to be more Hooveresque than Herbert Hoover had been, meaning putting teeth into the words of fiscal probity that Hoover preached but did not practice. That was standard orthodoxy at the time. Events caught up with Roosevelt and he changed tack.

This is why I have written an increasing number of posts referencing Herbert Hoover. I think it’s important to remember what Hoover was saying and doing. I see Barack Obama as a similar character. He is someone who stepped into a serious economic problem, unaware of how serious it was at the time. Both Hoover and Obama have been prepared to do some unpopular things to right the ship. However, neither was prepared to deliver the kind of radical agenda that Roosevelt did. It is seeing Obama in action which has most convinced me of the Zulauf view that the die may be cast. I am ever hopeful, so I say the die may be cast. I am hoping that it is not.

Source: Felix Zulauf: The Die is Cast – Barry Ritholtz

Here’s a partial list of the posts that show the evolution of my ideas at Credit Writedowns (I will add to this list in the next few hours as I think of posts that best reflect what I have been saying on this site. Feel free to make suggestions. That would be appreciated.)


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.