China car sales are bigger than in US. Capital flows from emerging to developed economies (call it a Lucas puzzle if you like). Former global leaders UK and USA nationalized their financial sectors and run 10 percent fiscal deficits, enjoying AAA ratings. I know that rating agencies missed the Asian crisis in 1997, they cheated investors on CDO ratings, but it is nothing comparing to their assessment of US or UK sovereign risk, you can call it any letter, but not triple A, just think of US government planning to issue 2 billion dollars worth of debt, and that is not taking into account president Obama printing press. Super-class (following David Rothkopf analysis) that ones ruled the world is gone, Russian oligarhs became micro- and then nano-garhs. Interest rates became meaningless, including USD and EUR LIBOR, the most important interest rate in the world. Nothing seems working, economic theory is of little help, and experience earned in the past 20 years it of even less help. Forget great moderation, this is not even the Greenspan’s age of turbulence. It is a great moment of reckoning it is also a Minsky moment. Anything can happen these days, even IMF is recommending high fiscal deficits to fend off recession. Remember the phrase called “Washington consensus”, a set of politically correct rules, ten commandments of US led economics religion. These gods are gone now. Godless world. Pain. Suffering.

One (once) investment bank has started sending this quote from Marx with every email referring to US government treasury market. Indeed.

“Owners of capital will stimulate working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and State will have to take the road which will eventually lead to communism.” Karl Marx, 1867

It is time that calls for great minds. 1920s and 30s had Keynes, now we have, I don’t know, Krugman, Rodrik, Sachs after reincarnation. Current mess will produce great new minds in economics, maybe Chinese rather than American, that will eventually write new General Theory of Common Sense, Prudent Finance and Faith.

Today economic discussion reminds me of the old days of Washington consensus as a dominant mantra, herds of economists recommend synchronized fiscal deficit as a remedy  to avoid global recession. When countries do otherwise, i.e. run prudent fiscal policy, they are attacked by major financial newspapers, they are incorrect. Everybody has to be imprudent and synchronized. If you treat Earth as a closed economy this makes sense, as there is no imports from Mars or Venus to weaken the synchronized fiscal multiplier. Who cares that huge rotten banks’ balance sheets gets transformed into huge, even more rotten fiscal liabilities. We have tripple A rating so we will worry about it later. Well, think what happened to triple-A CDO tranches and then think about sovereign risk again.

Here is my epsilon-contribution to the new global political economy. My theory predicts collapse of trade and long-lasting recession as a result of perfectly rational choices of governments trying to stop recession. Here it goes. When the Earth is undergoing synchronized fiscal easing under globalization (free trade and free capital flows) a country that opts out is made better off. If is a free-rider, its exporters benefit from fiscal spending in other countries and when the recession is over it emerges as a winner with lowest debt level. This is early German or present Polish strategy. Germany because of  history and tradition and Poland because it cannot afford large fiscal deficit amid risk of loosing credibility (think of Hungary or Baltic states). These free-riding countries should make a huge noise about benefits of globalization and resist slightest protectionist measures, so that their exporters can benefit from loose fiscal policy abroad.

What about countries running large fiscal deficits, think of USA or UK. It is perfectly rational that they do not allow others to become free riders and resort to protectionism (do not allow for domestic capital outflows, restrict imports) which increases fiscal policy multipliers. Buy American, British jobs for British workers, as we saw in the last few days. What is the equilibrium? Protectionism, reverse globalization, prolonged global recession. You do not need a beautiful mind to see it coming.

What can we do to stop it, to reverse a perfectly rational path into long and painful recession at the start of the 21st century. Coalition of the willing? Irrational governments? Read more Marx? I do not know, ask Paul Krugman.