Reverberating disquietude

Keynesian economic theory failure gave the thread of monetary policy a good jerk (insert Bernanke joke here), and now the whole sweater is starting to unravel:

While Barack Obama was being sworn in to office on Capitol Hill yesterday, the people of Iceland were starting the first revolution in the history of the republic. The word "revolution" might sound a bit of an overstatement, but given the calm temperament that usually prevails in Icelandic politics, the unfolding events represent, at the very least, a revolution in political activism.

Four months after the collapse of Iceland's entire financial system, no one has accepted any responsibility. Our currency has lost more than half its value, rampant inflation has already eaten up most people's savings, property values have dropped by more than a third and unemployment is reaching levels never seen before in the life of our young republic. The fault is clearly shared between the business elite and the government, which failed to regulate the newly privatised financial sector, allowing a few incompetent and egotistical business tycoons to gamble with the nation's fortune. And yet neither the government nor the bankers – who, by the way, seem to have disappeared into the cold thin air – see anything wrong with their own behaviour.

And while Iceland is an excellent microcosmic example of what can be expected as the correction takes its course, it is not alone:

The financial meltdown has become part of the real economy and is now beginning to shape real politics. More and more citizens on the edge of the global crisis are taking to the streets. Bulgaria has been gripped this month by its worst riots since 1997 when street power helped to topple a Socialist government. Now Socialists are at the helm again and are having to fend off popular protests about government incompetence and corruption.

In Latvia – where growth has been in double-digit figures for years – anger is bubbling over at official mismanagement. GDP is expected to contract by 5 per cent this year; salaries will be cut; unemployment will rise. Last week, in a country where demonstrators usually just sing and then go home, 10,000 people besieged parliament.

The United States has avoided the worst of it so far, but that in itself is a small comfort: the damping effect of the Federal government's interventionist policy prevents a swift correction of accumulated mismanaged assets, just as that same interference amplifies existing and/or expanding "bubbles" in the economy. When the good times were good, we enjoyed a level of opulence unseen since the halcyon days of Palatine Hill.

However, to draw on thermodynamic law and popular wisdom, there ain't no such thing as a free lunch. Predictably, unfortunately, and inevitably, the crash will mirror and match the meteoric rise of the economy pound-for-pound, inch-for-inch, and the very same Statist high-priests that kept the economy from correcting itself will keep the correction from clearing the detritus of failed institutions to make way for new growth.

Strangely enough, it is not all that different from the Federal government's forest-management policy in the western United States: unmitigated growth and fire-suppression until a "critical mass" stage, wherein a devastating, yea, holocaustic inferno consumes the entirety of the diseased and dying forest, causing otherwise healthy trees to explode from the heat and sterilizing entire swathes of wilderness.

I am willing to bet that the recovery will take a similar course: decades.