By BJ Bjornson
Matthew Lynn has some bad news for those hoping for a better economy anytime soon. He sees in the current crisis too many parallels to the Long Depression that started in 1873 and lasted until 1896, a depression created by structural problems rather than the demand collapse of the 1930�s.
He offers five lessons that we should learn from that example, two of which I�l quote.
Second, this depression is structural. The long depression of the nineteenth century had its roots in financial speculation, technological change, and the arrival of a massive new player in the global economy. Our depression likewise has its roots in three huge crises which are all coming together at the same time. We have a debt bubble that has been building up over three decade and which burst spectacularly in 2008. The dollar is in long-term decline as a reserve currency, and as the anchor for the global monetary system, but there is still not much sign of what will replace it. And in the euro, the biggest single economic bloc has created the most dysfunctional monetary system in human history, threatening financial collapses on an unprecedented scale. Think of it as the world economy suffering a heart attack, then a stroke, then getting picked up by an ambulance that crashes on the way to the hospital � it is hardly surprising the patient isn�t in good shape.
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Five, it won�t be fixed easily. The parallel with the 1930s is dangerous, because it has convinced bankers and policy makers that if you can just pump up demand, everything will be okay. It won�t. Sure, demand is important � there is no point in letting it collapse. But this won�t be over until all three structural problems get fixed. Debt needs to be paid down to manageable levels, a new reserve currency needs to be created, and the euro needs to be put out of its misery. None of these are simple tasks, and none will be done quickly.
It probably doesn�t help to say that I�m even less optimistic about a successful recovery that Lynn, in part because some of the structural dysfunction that needs to be fixed is one he fails to really mention in his fixes, the tightening of regulations of financial speculation and over-leveraging that caused the 2008 crash and continues to dog the global financial system. The U.S. missed its best chance for really getting a handle on the banksters that started the ball rolling, and may never get another one in time to make any real difference.
Even more important in the long term are two more structural issues that are going to crimp growth even further than the troubles in the financial realm could do on their own, and will act as a brake on any recovery well past the 2031 date Lynn chooses as an arbitrary end date based on the timeline of the 1870�s depression, namely Peak Oil and Climate Change.
Peak Oil is in a sense the simpler of the two, in that the price for oil has already be shown to have a braking effect whenever the economy starts to heat up. The days of cheap oil are already passing us by, and with so much of our infrastructure based on liquid fuel technology, the high cost of maintaining or switching over to alternatives is going to crimp our overall ability to do anything else. On the somewhat bright side, at least this added cost will show up on economists� radar and stat sheets, so they won�t be able to ignore it.
Climate Change, on the other hand, remains an externality in nearly all respects when it comes to economics, but its effects, in terms of more extreme weather events; droughts, floods, snow and ice storms, etc., are already beginning to be felt, and will only increase with time since we appear incapable of doing anything about it that might threaten economic growth that is already going to be anemic at best thanks to the conditions Lynn has already laid out.
Gets rather depressing sometimes.