Another financial scenario

So Obama says we're going to run trillion dollar deficits for years to come. And, he adds, we're eventually going to have "change" (e.g. massively cut) the social safety net to rein the deficit into line. 

As Small Precautions has noted before, this is in fact the usual outcome of huge debt and banking crises: the slashing of social services and the immiseration of the middle class. We're really at the beginning of the crisis, and it's going to be an utter disaster for the boomers, who are going to see their retirement funds decline, inflation erode away their pensions, and a collapse of social security and public health funding.

As bad as all this will be (and most of this stuff strikes me as all but inevitable), Martin Wolf asks if even this may not be the worst of it, because what if all these painful fiscal measures are not enough to get the U.S. economy back on track:

Think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

I think one should be careful about making the historical parallels to the 1930s too neat -- after all, back then the world economy and particularly finance was far less integrated than it is today, Europe still governed massive mercantalist colonial empires, the specter of Communism haunted the world, and we didn't have massive built-in countercylical fiscal measures (e.g. unemployment insurance, social security, etc.).

With that said, the current crisis will certainly tempt many countries to return to autarchic economic policies, perhaps green-washed under the rubric of "sustainability" or "resiliency."