It more or less goes like this: “Although there is very little demand in advanced economies, and no evidence whatever of anything but low core inflation, we must consider raising interest rates, so as to give confidence to those who destroyed our economies and now sit on the sidelines”.

Gorilla says: “What’s needed are C-130 drops of money and a jobs program!”

Gorilla translates: “It is a matter of credibility for the G20 to agree to be something other than an indicative guideline of stupidity”.

Today, it’s Italy and Spain, but the larger issue remains: extend and pretend isn’t working on either side of the Atlantic and the day of reckoning is fast approaching.

For Euroland, the problem is straightforward: the PIIGS are going to default, the only questions are how big the haircuts will be and whether the euro currency regime survives.

For the US, bank loan losses have still not been fully marked to market, and they are substantial: several trillion dollars.

There will be at least another 5-10 years of high unemployment and deflation until and unless politicians get serious about creating jobs (vastly more stimulus is needed, on the order of $2 trillion/year for the next 3-5 years) and enforcing moral hazard (politicians cannot continue being wholly owned subsidiaries of a bankrupt Wall Street, and house prices need to fall another 20-30%).

With the Know Nothings guaranteeing another 2 years of stagnation and gridlock in Washington, it’s difficult to be anything other than pessimistic about the rest of this decade.

Gorilla says: “When we have no leaders, we’re all bottom feeders!”

ECB Chief Trichet thinks it’s all about the confidence fairies. Slashing deficits and cutting spending will make the markets feel better, and therefore growth will resume. This approach is without question the stupidest policy position held by a central banking head in living memory. It guarantees at least a decade of crippling, deflationary stagnation, accompanied by social disruption and mass unemployment.

Meanwhile, Treasury Secretary Geithner says we should not stop stimulus in the short-term and deal with deficits once it’s clear the world economy is recovering. A fine sentiment, except that the US is doing nothing to provide additional stimulus, while policymakers like Geithner and Bernanke seem to be quite comfortable with 15 million or more jobless citizens for the foreseeable future.

Gorilla says: “Not much hope when two major economic players are committed to being as stupid as possible for as long as possible!”

Why? Because the Germans fear inflation and the rest think that markets want to see some pain.

It’s certainly not because of economics, which would suggest that governments run larger deficits now to deal with a global output gap in the trillions.

And so, as Krugman and other have pointed out, we’re staring at a decade of piffling growth and a permanently unemployed underclass in most developed nations.

Oh, and all those righteous promises to rein in the power of the banks? Good luck with that!

Gorilla says: “You can’t abrogate responsibility much worse than they do at the G-20

This comes from a European market analyst commenting on the plunge in world stock markets.

The feeling is that the economic recovery’s going nowhere and another round of recession may be on the cards. It’s not helped by the very large debts facing Euroland, as Ireland, Spain, Greece, and Portugal look to be in various stages of unsustainability.

Here in America, the stimulus program has been woefully inadequate and half of it has gone to tax cuts, the least effective form of stimulus.

With a $2 trillion output gap and 10% unemployment, our leaders seem to be more concerned with permanent campaigning. Lots of talk and little action don’t appease voters who are fed up with the lack of coherent economic policy.

The housing sector continues to be blighted, as the Treasury Department seems tone deaf to the idea that prices must fall further, and lenders must take haircuts, until supply and demand get back into something like balance.

Meanwhile, the dollar carry trade continues bubbling along, driving up the prices of commodities worldwide. Absent the US, Japan, and Euroland, the Chinese and the Indians can’t bring the whole world out of the slump because their economies aren’t big enough.

Gorilla says: “The bubble’s gone off the boil, but the anger still simmers!”