Interesting article, wrong diagnosis, right about fears for the future, wrong on what to do about it.

Poor economic policy decision making is just another part of the problem, like the property bubble, fiat currency and US hegemony -- pieces of the puzzle. Yes, the immediate problem we have now is debt deflation and the cause of that is the unwinding of the Ponzi-scheme-like pyramids of debt built up over 20 years or more as cash flows can no longer build them higher, but these are just consequences of a deep problem in global finance.

The root cause is that Western democracies have been funding economic activity and consumption out of debt, in excess of productive capacity, while developing countries like China have been creating excess productive capacity and generating surplus savings, which they have lent back to the West. This cycle has produced the "Great Moderation" and one of the longest periods of prosperity ever, involving well over half the world's GDP. It's over.

Now debt is everywhere: private, business and government. Some of the smartest people on the planet have been engaged in finding new ways to create debt and places to hide it (and getting paid well do do it). Yes, many of those people were in the USA but no single country was the cause and no country will escape. Europe and exporters like China will probably be hit worse than America. The system is broken.

No, the US dollar is not about to crash, because there is nowhere else that is safer. Yes, we need a replacement for Bretton Woods, but fixing the global financial system is more important than commodities or gold. With the banks broken, international trade is impossible and the consequences of that are unthinkable.

Keep it up, Ken, looks like a near dead Maynard Keynes was right during Bretton Woods when he warned about a coming Casino Capitalism without his eco' philo's.

As even Adam Smith was right way back when he warned about greed messing up the need that was truly the intention of the freedom for his marketing.

It seems to me that the author has put his finger on one of the basic problems that plague the world - that the US has been living beyond its means since WW2, and Australia has been doing the same since 1972. What I am not so sure about is any of the methods proposed to fix the problem, because as soon as any system causes difficulties for the government (gold standard, bretton woods, etc.), the government defaults on its obligations to uphold the system. As a result I would agree with the author that we ain't seen nothing yet, but cannot work out how to preserve my capital. The one thing that is obviously needed is for the standard of living of the ordinary worker to be reduced substantially, but how you do this and remain in power is not something that I can advise governments on.

However, although the world at large may be going to hell in a handbasket, the fact that Australia is the only country in the world with the four vital things (food, energy, minerals, and a sea boundary) means that we stand a better chance of survival in our little corner of the world than most countries. The main thing we need to do is to stabilise our population by cutting back on migration and stopping the inevitable flood of refugees, and hopefully rising unemployment will bring this about.

And we haven't even mentioned two other little problems, that the production of oil has peaked, and that peak oil will shortly be followed by peak food. The current collapse in demand for oil has cut the price for a brief interval, but any recovery will send it soaring again.

Should be an interesting century.

An interesting century indeed.
I always thought that money and the money market supposed to be the mechanism that allowed the real economy to work. Barter was too restrictive so we had to learn how to barter at a distance using a medium of exchange. But it was the capacity and ability of the real market that makes a healthy economy.
Greed reverses this. The real problem as I see it is that with greed the money market drives the real economy beyond capacity until it breaks.
The stock market was a good idea. It allowed small investors to aid companies that needed to raise capital to expand in the real economy. But it quickly became the world's largest floating poker game. Loans that allow people to buy houses are a good idea provided the person who obtains the loan is able to repay the loan. As soon as the money market becomes greed driven and the money market drives the real economy will have a problem. It is always going to end in disaster.
I do not see regulation as an ideological thing. The real economy needs to be kept healthy no matter what a person's ideology is. Regulating to ensure the money market acts in response to the real economy is essential for long term economic health. If that means restrictions on how the stock markets work, and how the loan markets work then it is only a product of those markets inability to manage there own affairs. If those regulations appear draconian to the greedy then so be it.
There are any number of good systems (Such as proposed in the article) that would fail because of greed. As we hope move through this financial debacle and attempts are made to find better financial systems I hope that we remember that we are not regulating for the honest, we are regulating for the greedy and the corrupt.
Whether or not regulations appear restrictive or not depends on if a person is honest or corrupt. But no matter what we do greed will probably find away around it.

You would think that from the propaganda coming from the austrian school of economics there were no recessions or depressions before the concept of Keynesian economics appeared, this is simply not correct. Recessions/depressions occurred in 1797, 1807, 1819, 1837, 1857, 1873, 1893 for instance all prior to the advent of Keynesian economics.

If we look at the recent financial crisis, it’s real root cause is that the private financial institutions have created a “blackmarket” fiat monetary system via the creation of derivatives notionally linked to the residential property market in the United States.

Looking at the damage done by the merchant bankers in this unregulated market it is unbelievable that the sales reps for the Austrian School believe that Governments should abandon the regulation and control of the monetary system and hand it over to these same cowboys.

On face value thats a great article. I too predicted the decline in the world markets and the damage is far from over because the real economists havent adressed the problem.Throwing money that doesnt or will not exist isnt the solution.the real fiscalsolutions being
proposed are just the same as the ones used for inflation. That in itself tells us the treeasury hasnt got a clue andfollowing the spin from the rest of thw world wont help either. I believe it wasthe british treasurer / prime minster that originally suggests the current confidence trick we are now experiencing.