Reply #14: Pollyannas, the lot of them.

[GliderGuider]

Krugman doesn't get it. Not even Nouriel Roubini, the doomer's doomer of economists, truly comprehends what's about to happen.

The current economic discussion utterly fails to take into account the effects of the rapidly worsening global energy situation (aka Peak Oil) and the consequences that the draining of the financial capital pool will have for our ability to bring oil alternatives on-line in time. Without oil or a substitute, economic activity will be constrained by both financial and energy shortages, rather than just one or the other. Most energy substitutes that have the scalability to meet the challenge (e.g. a switch to electric cars and electric rail) require serious capital to fund the infrastructure build-out, and capital is in shorter supply every day. The double whammy of oil shortages and capital shortages could even result in a worsening of global warming if we switch to cheap coal rather than expensive renewables to replace our declining oil supplies. We have at most 5 years to address this situation. At this time there aren't even any coherent plans in place and money is rapidly becoming scarce.

Then there's the global food situation that is being exacerbated by climate change (which is causing worsening droughts and floods), the rising cost of fertilizer and the depletion of irrigation water. The global economic recession will have amplifying consequences for regional food shortages, since lower economic activity and the implosion of global credit markets will have a braking effect on donations for international food aid. This is already happening to Zimbabwe. If a region's food supply declines, so does its economic capacity, as an underfed workforce is much less productive. That in turn makes the recession or depression worse.

All these factors will work together over the next two to five years, and the interaction has the potential of creating a level of global distress that is an order of magnitude worse than a simple recession, no matter whether it looks like a V, a U, a W or an L.

This is a serious shitstorm we're facing. I expect the situation to transition from recession to depression rather suddenly, though I don't know when. What I've read over the last four years has led me to the conclusion that that by the end of 2010 we'll probably be in the first year of a global depression, one that could last several decades due to worsening energy shortages and the rising relative cost of raw materials. In fact it's entirely possible that the situation by 2020 could be the new normal -- the words "recession" and "depression" imply recovery, which IMO is not at all guaranteed in this situation.