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.
This is not your ordinary recession or depression. This is a time of transition from a World economy based on cheap oil to one without cheap oil. We have trillions of dollars in debt that is never going to be repaid which will result in the too big to fail failing. Climate change will also be a factor. I don't know what the new order will look like but it will be a lot different and will have a lot fewer people. Getting there is going to be ugly which makes me glad I'm old and have no grand children to worry about.
ReplyDeleteDean Baker says real estate is still substantially overvalued from where it would be today had the banks and hedge funds not created the bubble. That means it's got a ways to fall yet, and that's bad news indeed for local government, which in large part relies on property tax revenues. Municipalities and counties, at least, can establish sales taxes, but with so much unemployment, which is growing in the public sector, there are fewer and fewer able to spend much and thus raise sales tax revenues. Jobs would go a long way to stopping the hemorrhaging, but there's no sign enough people in Washington really care about jobs to get anything done.
ReplyDelete"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."
ReplyDeleteThere is meat on those bones for a couple of reasons. First is that this recession was triggered by an excess of debt, and that debt has not been erased. It must be either repaid or written off, and it is currently being "revalued" by phoney accounting. It is still debt which cannot be repaid ans, as such, is an anchor preenting recovery.
Second is that the fable about World War Two creating demand which brought us out of the Depression of the 30's is true, but not in the way that is generally seen. It did not create a current demand in terms of prosperity, but rather a future demand by pretty much destroying the known, civilized world. It was the rebuilding after the war that brought the kind of demand which results in prosperity.
the fable about World War Two creating demand which brought us out of the Depression of the 30's is true, but not in the way that is generally seen.
ReplyDeleteVery good point. The postwar prosperity of the Fifties was more about shifting from an agricultural economy with one bread-winner families to an urban economy with two incomes. Women in the workforce during the war didn't return to their homemaker roles when the war ended. The prosperity earned was the result of actual productivity, not financial speculation.
As the years passed demand caught up with supply and the two-income family model replaced the single-breadwinner model. With the country awash in money it was only a few years til the idea of "making money from money" took hold -- she birth of a fiscal delusion based more on debt than real productivity. The real ROI (return on investment) is the growth of net worth (assets exceeding liabilities). One's credit score is a metric of wealth but net worth is the real gauge of success.
The bad news...for local government, which in large part relies on property tax revenues mentioned above is even worse than the shrinking of local tax revenue. Property taxes are not based on real net worth but perceived net worth, derived not from how much is actually owned by the property owner but tax assessors valuations which don't take into account how much of the property is "owned" by creditors, not the occupant whose name appears on the deed.
Not entirely sure I agree with your logic on WWII. It�s true that it didn�t bring much in the way of prosperity during the war, since the demand created was for weapons that were shipped overseas and then destroyed in their vast numbers, destroying a good chunk of civilization with them, it�s true. However, that destruction wasn�t taking place in North America, which is why the U.S. came out of the war an economic powerhouse and why it took so long for Europe and Japan to recover sufficiently to reassert themselves, though no longer to the pre-eminent level that the U.S. now enjoyed. The war�s production, like pretty much all military spending, was the equivalent of paying people to dig holes and then fill them back up, but the demand for bombs and bullets, and bodies to absorb the enemy�s, ended any employment issues. Basically, the war grew the economy vastly, just not in a way that actually helped everyone in a material sense.
ReplyDeleteOnce the vast production facilities and resources turned to those tasks were freed up by the war�s end, they could move to creating that wondrous consumer society we all know and love, with strong unions and G.I. Bills and so forth creating the well-off middle class who would share in the profits gained from increased productivity that such a society needs to continue.
Also note the fact that all of that wartime production and rebuilding was financed by debt and deficits, the level of which dwarfs the current federal level when considered as a percentage of GDP.
And while I don�t have the data in front of me, I do believe the entry of women into the workforces in truly game-changing numbers and the normalization of two-income households didn�t happen until much later, late enough that it hid some of the decline of middle class income compared to productivity gains, which decoupled in the late 70s early 80s.