Great Depression 2.0: Is it Over Yet?

It's been almost a year since I wrote Great Depression v2.0: Missing Piece Of The Puzzle.

Let's review some main points. We have had only one full blown worldwide Great Depression for comparison: 1928 - 1938 (there is a point of view that it only ended in 1942). There are also two known (to me) depressions which were not international: the Depression of 1873-1879 in the US and the Great Japanese Depression: started in 1989, still counting.

There is one common thread binding these three crises. Each one had three components: a real estate boom which went bust, a financial crisis and a structural crisis. A lot was written about the first two factors, but the structural crisis component somehow avoids economists' attention. Which is unfortunate, because it's key. There are a lot of examples of financial crises, which were resolved relatively quickly. There are examples of real estate crises which didn't crush economies: 1990 - 1991 in the USA, 2003 in the UK and plenty of others.

A structural crisis is different. It's created when some new technology or market change, or combination of both changes the way a significant part of the economy works. Initially there is a boom, as the new technology creates new jobs and new demand for products. But later on, old industries get killed by the new technologies. In an ideal case, the economy adapts quickly enough to the change, no other big crisis happens and everybody is happy. Examples: personal computer revolution of 1980s, first phase of the internet revolution in the end of 1990s. Below are the not-so-ideal cases.

By 1873 in the US there was a huge buildup of railroads. A lot of money was invested in them and the associated real estate. Railroads changed the way the economy worked, creating a structural crisis. Whole industries (for example, cattle runs, the Pony Express mail, shipping between the East and West coasts around the Horn) were about to be destroyed. Maybe this process could have been less destructive, but in 1873 the country adopted the Gold Standard, triggering severe deflation and financial crisis. A real estate crisis quickly followed.

By 1928 the developed world mostly switched from the horse to the internal combustion engine in transport and agriculture. It was a huge structural change, which was going relatively smoothly. But at the end of the 1920s the US was hit by a real estate crisis, and a stock market drop in 1929 created a financial crisis. Welcome, Great Depression. The structural change was worldwide and so was the depression.

By 1989 Japan achieved great success as an exporter of excellent and inexpensive products. Japanese companies became world leaders in car, heavy equipment and electronics manufacturing. Unfortunately, the internal economy changed slower than export-oriented; sometimes economists joke that there are two economies in Japan. The Japanese, being extremely conservative people, invested most of their savings in real estate. Some money started moving to the stock market in 1980s, including a lot of foreign money. There were two bubbles in Japan by 1989: real estate (several blocks in the center of Tokyo were priced higher than all of the real estate in California) and stock market (P/E of Nikkei was, if I remember it right, around 57!). It's the longest running depression in the modern world now.

Bernanke just said that the recession is technically over. Great. If we get out of this crisis next year, I will be the first to propose the installation of a giant gilded statue of Mr. Bernanke right in front of the Federal Reserve building. I have my doubts though. The three depressions mentioned above didn't finish until the structural imbalances were worked out. It takes time. The Japanese Great Depression is an example of what happens when the government and the Central Bank try to fix a depression using financial tools alone: nothing. I just hope that the people of Japan started the necessary structural changes by voting LDP out of power.

The current structural crisis is a result of a double whammy: internet plus globalization. A lot of good things happened as a result of the two, including fast development of poor countries such as China. But this development also created huge imbalances. There are whole industries which have to downsize and restructure. First of all, everything related to information. Newspapers, TV, magazines, music, phone services, books. Another imbalance: the prices of commodities. Most of them are overpriced, compared to historical trends. Mining industries and agriculture didn't keep up production with demand. But they will catch up, eventually. Big imbalances need a long time to be worked out.

Of course, we can hope that the governments and central banks of the world managed to fix the current crisis and everything is going to be just fine soon. Hard to believe though.

How does depression affect investments? Long term, it depends on societies, governments and central banks making the right decisions and not trying to sweep problems under the carpet. That's the difference between the Great Depression of the 1930s and the Japanese Great Depression. Let's suppose we are going the American way, not Japanese way. If it's true, now is the time to buy, buy, buy. Despite the high probability that we have several years of worldwide depression ahead of us. The best time to buy stocks in the 1930s was in the middle of 1932, when the Great Depression was just flexing its muscles. The current depression is running faster than before but my assumption is that we are in the equivalent of 1932 now.

What to buy? Forget about commodities. Long term, they are dead as an investment class. Depression = deflation, forget about other inflation fighting investments. Invest in the future, in new technologies. Most of the tech companies don't have any debt and have a lot of cash. Cash is king during deflation. Some of the companies will fail, some will win, but as a class, techs will win. Banks will win since they can get money from the Fed. Sin always wins: tobacco companies pay huge dividends and usually do great in a crisis. Don't know about anything else.

The danger is, as usual, in assumptions. If we go the Japanese way, cash is the only way to go. I'm betting on the American way.

Comments

[CautiousInv...:]

The Real Economy
Two days ago it was improved retail sales, yesterday it was expanding industrial production and it'll be something else tomorrow. ISM surveys are improving, housing is rising, and consumer confidence seems to be improving. At the margin trade is improving. Unemployment claims are ebbing, job losses are slowing but pernicious unemployment remains and is likely to creep up to 10% or more. Zachs expects earnings to improve on a YOY basis as result of cost cutting and measuring today against a horrible yesterday.

Financial Economy
Credit card chargeoffs exceed levels assumed in the adverse scenario of the stress test; all foreclosures underway increased 88% month over month; personal bankruptcies were up 22% in August YOY; small business bankruptcies are on track to double this year; measures of the money supply are contracting; and total outstanding bank credit is contracting at a 14% rate through the last three months ending August..........the fastest pace since the depression. Amid mounting losses, fraudulent accounting compromises have and will allow banks to report glowing levels of profits while luring investors to help them recapitalize. All the credit spreads have narrowed; panic has been replaced by an unwillingness to lend. Casino activities have reumed.

LaLa Land
The Fed and congress have unleashed unprecedented stimulus to avert from us falling into a financial abyss; the abyss has been averted but we could easily stuck at the precipice. The dollar is sliding amid rising federal borrowing; estimated cumulative deficits have grown to $9 trillion through 2019 while our creditors, particularly China and Japan, grow increasingly worried about our structural imbalances in fiscal policy……really a policy of craven politicians avoiding reality. There is constant discussion of replacing the dollar as the world’s preeminent reserve currency. Cumulative projected world borrowing outstrips cumulative global savings.

Synthesis
It may not be until the second quarter of next year before disconnects between various measures of economic activity and health are reconciled with various measures of economic malaise and financial sickness. Most if not all improvement in reported economic activity is a result of the combined effects of liquidity and fiscal spending. Structural imbalances still remain and unemployment will remain stubbornly high, compounding a desire for consumers to retrench, save and liquidate debt. The reality of a new normal has not set in.

Unlike Bernanke and almost all so-called experts in the Fed and government, Rosenberg has opined that "rampant fiscal stimulus" accounts for all of this year's growth and 80% of next year's. In the second quarter of this year, the total economy purportedly contracted by a 1% annual rate; Rosenberg said it would have plunged by 6% without that stimulus. The consensus is for 2 to 3% growth this quarter. Rosenberg says it would be zero without all that money pouring out of Washington.

Financial reform is likely to be muted and largely symbolic, toxic assets still haunt bank balance sheets and CRE is a looming financial nightmare capable of pushing over the financial sytem over the edge and into a permanent free fall. From an interview with Nassim Taleb: "After finishing The Black Swan, I realized there was a cancer. The cancer was a huge buildup of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions.

They're all still here. Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren. What is the effect? The doctor has shown up and relieved the patient's symptoms – and transformed the tumor into a metastatic tumor. We still have the same disease. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment.

Sep 17 09:39 AM

[Michael Clark:]

1785 Night Cycle Economic Bubble Debt Deflation begins –
1803 Day Cycle Economic Bubble Credit Inflation begins.

Robert A. Becker writes in A Companion to the American Revolution:

"The states ended the war, as did Congress, with massive debts to pay. Virginia’s public debt stood at 4,250,000 pounds in 1784; Massachusetts’ (debt) at about 1,500,000 pounds in 1785. The state debts included money owed for supplies, their old depreciated war currencies, some of which still circulated, and debts owed to soldiers for back pay. The post-revolutionary states regularly allocated 50% to 90% of their revenues to pay the interest they owed on their revolutionary debts. To raise it, and some principal, the states levied heavy new general taxes, and tried where possible to collect indirect taxes, such as imposts – the very revenues Congress wanted to appropriate for the national debt. The politics of postwar finance and taxation in every state was, then, a matter of vigorous an occasionally violent dispute….
"The legislature’s refusal to relent on its deflationary debt policy in the midst of the postwar depression was in part responsible for the outbreak of rioting in western Massachusetts known as Shays’ Rebellion. Throughout the new republic, as taxes rose to sink the states’ debts in the midst of deflation and depression, angry taxpayers began demanding relief – tax abatements and postponements, the right to pay in virtually any sort of outstanding ste or federal notes or certificates, or to pay in commodities and produce. Most state (Massachusetts excepted) adopted extensive tax relief programs in the mid-1780’s…

General Henry Knox, the Commander of U.S. forces who opposed tax rebels in 1786, wrote:

"As the situation worsened in 1786 armed bands of impoverished debtors forcibly prohibited courts from sitting including the Court of Quarter Sessions in Worcester County. Violence was most intense in New England and the Northeast, where population pressures combined with depleted soil to press subsistence [sp] farmers to desperation. Rioting mobs intent on preventing the enforcement of judgements [sp] against debtors struck in many areas, including New York, Connececut [sp], Vermont, New Hampshire, Rhode Island, and Massachusetts.
In Massachusetts, Connececut [sp], and Rhode Island the discontent was organized along military lines. thousands of men, commanded by continental army Veterans and current officers of the Massachusetts state militia, were organized into rebel regiments."
The most important military engagement of these revolts was Shays' Rebellion, a battle for a Federal arsenal at Springfield, Massachusetts, on January 25, 1787.
Their Creed is, that the property of the United States has been protected from the confiscations of Britain by the joint exertions [sp] of all, and therefore out to be the common property of all; and he that attempts opposition to this creed is an enemy to equality and justice and ought to be swept from the face of the Earth...."

1821 Night Cycle Economic Bubble Debt Deflation begins –
1839 Day Cycle Economic Bubble Credit Inflation begins

The Panic of 1819 was, according to historian David Reynolds, ‘the first great American depression’. Reynolds writes in "Waking Giant: American in the Age of Jackson:"

"All the way back during the Presidency of James Monroe, American workers got a harsh lesson in the vicissitudes of capitalism when the economy crashed. The Panic of 1819 initiated the nation’s first major depression...."

Panic and Depression, 1832. In 1832, President Andrew Jackson refused to renew the charter of the Second Bank of the United States; and Jackson transferred government monies to state banks. Nicholas Biddle, head of the National Bank, called in all outstanding commercial loans. A panic followed; and then a recession. Eight hundred banks closed; and the national banking system collapsed. One third of manual laborers were out of work in New York City alone. And the national unemployment rate was over 10%.

Panic and Depression, 1836. President Andrew Jackson comes to recognize that his defeat of the National Bank in 1832 might present long-range problems for the country. In an effort to short-circuit the inflationary consequences of unlimited printing of money by unregulated state banks, Jackson issued the Specie Circular, which law required all public lands be paid for in gold or silver, hard currency. Land sales and prices collapse. The hoarding of precious metals. Land and metals speculation explodes.

Panic and Depression, 1837-1843. Historian Reynolds writes that five weeks after Martin Van Buren’s election, national pessimism and erratic bank policies sank the economy and triggered ‘the worst depression that the United States had known’. Reynolds writes that this fourth panic since 1819 lasted from 1837 through 1843:

1857 Night Cycle Economic Bubble Debt Deflation begins –
1875 Day Cycle Economic Bubble Credit Inflation begins.

Donald J. Mabry, in his article ‘Economic History, 1843 -1857’ describes the vigorous American expansion of this Day-Cycle. The inflation of the credit bubble brings inflated prices, an inflated sense of national mission, and an inflated masculine power that brings conflict to the world.

"From 1843 to 1857, the market economy showed what it could do without a major economic depression. The results were impressive...."

The Panic of 1857. America did have an economic panic that began in 1857; this led into the Dark Half of the 18 year cycle (the Night-Cycle) which led, shortly thereafter, into the American Civil War.
J.S. Gibbons writes in The Banks of New York, Their Dealers, the Clearing-House, and the Panic of 1857.

"The major financial catalyst for the panic of 1857 was the August 24, 1857, failure of the New York branch of the Ohio Life Insurance and Trust Company. It was soon reported that the entire capital of the Trust's home office had been embezzled. What followed was one of the most severe economic crises in U.S. history....The contraction of the economy that followed the panic of 1857 was profound and had parallels in Europe, South America, South Africa, and the Far East causing it to be held as the first worldwide economic crisis.
"In the U.S., the setback caused significant job loss; a major slowdown in capital investment, commerce, land development, and the formation of unions, as well as in the rate of immigration. The effects of the "revulsion," as it was referred to at the time, lasted a full eighteen months and reverberated until the onset of the Civil War...."

Gibbons speculates the world-wide financial crisis lasted for 18 months. My thesis, of course, is that the period of chaos and depression lasted much longer, from 1857 – 1875: 18 years. Historians tend to think of history as a succession of unconnected (or loosely-connected) events. Discrete happenings: here today, gone tomorrow. A connecting theory or structure of history will enable historians to organize isolated incidents into a fabric of causes for better understanding cycles in history.
Historians seem to agree that there was a Panic of 1857, a depression caused by the Civil War 1861-1866, a Panic and Depression of 1869-1871, and a Panic of 1873.

Miriam Medina writes in her article ‘The Panic and Depression of 1869-1871’:
"BLACK FRIDAY: The term is often used to designate a dark financial day. September 24, 1869, is sometimes referred to as Black Friday in the United States. On this day a syndicate of New York bankers advanced the price of gold to 162 1/2, causing a panic. It sold at 143 1/8 the previous evening. The Grant Administration dumped $4,000,000 in gold on the market, the price falls in fifteen minutes from 162 to 133, and many investors were ruined. Fortunes were lost. Wall Street brokerage houses failed. Railway stocks shrank. The nation's business was paralyzed. Another such day was Friday, Sept. 19, 1873, when Jay Cooke & Co., leading American bankers, failed. A great crash ensued in Wall Street, the center of financial operations in America, and the historic panic of 1873 began. Credit generally was impaired and many financial institutions were forced into bankruptcy..."

Ms Medina also writes about the ‘Panic of 1873’.

"The Panic of 1873 begins another period of [American] depression. The economy is in fact over-expanded, particularly in railroad construction, and the weak link turns out to be the banking house of Jay Cooke and Company, which helped the U.S. Government finance the Civil War and also underwrote the construction of the Northern Pacific Railroad. Jay Cooke and Company, a large and respected banking house declares itself bankrupt, and announces its failure on September 18, 1873. (The bank's collapse precipitates the "Panic of 1873" and the ensuing three year depression during which more than 10,000 businesses fail.)...


1893 Night Cycle Economic Bubble Debt Deflation begins –
1911 Day Cycle Economic Bubble Credit Inflation begins.

. David O. Whitten writes in his article ‘The Depression of 1893’ about both the depression and the impressive growth of the preceding Day-Cycle (1875 – 1893):

"The Depression of 1893 was one of the worst in American history with the unemployment rate exceeding ten percent for half a decade. This article describes economic developments in the decades leading up to the depression; the performance of the economy during the 1890s; domestic and international causes of the depression; and political and social responses to the depression.
"The Depression of 1893 can be seen as a watershed event in American history. It was accompanied by violent strikes, the climax of the Populist and free silver political crusades, the creation of a new political balance, the continuing transformation of the country's economy, major changes in national policy, and far-reaching social and intellectual developments. Business contraction shaped the decade that ushered out the nineteenth century...."

Whitten claims there were two depressions, 1893-1894 and 1895-1897. Of course, these two depressions were probably the same depression, with separate surface appearances, but with a common root system.
There was also a depression in 1901. And there was also a bank panic caused recession/depression in 1907 – the so-called J.P. Morgan bank panic, caused by America’s leading banking family for the benefit of America’s leading banking family. We are seeing, as we have seen in the other Night-Cycle periods, a sustained de-construction of matter lasting for very close to 18 years. There are bull rallies in the stock markets during periods of economic deflation. There are companies that thrive. There are attempts made by the masters of money to turn the tide of the economy in the direction of prosperity. These rallies are bear traps. The bears control the markets, with their negative energy: a combination of dread, sense of righteous self-martyrdom, appreciation of the tragic (the tragic view belongs to the Romantic) – and a real terror of sudden poverty which leads to tight-fisted saving as an ethic, which new Puritanism sinks the world further into inactivity, as the currency dries up in bank accounts, no longer circulating, which cripples the body politic. Banks refuse to lend, since fewer and fewer people become credit worthy. Fewer and fewer people want to borrow, as borrowing is viewed by the suddenly self-sufficient natures as foolish, at best, or part of a criminal intrigue they wish to avoid. Bankers are viewed as satanic accomplices. The capitalist is equated with the slave-owner and the heartless landlord.

1929 Night Cycle Economic Bubble Debt Deflation begins –
1947 Day Cycle Economic Bubble Credit Inflation begins

We all know about this depression. Actually, there were a series of deep-recessions followed by shallow 'recoveries': 1929-33 depression; 1936-37 depression; 1937-39 deflation; World War II depression 1941-45, and 1946-47 depression.

In their article 'The Great Depression of 1946', Richard K. Veddar and Lowell Gallaway write:

"It seems inevitable that some Ph.D. student in economics wome time soon will pick up a recent copy of the Economic Report of the President looking for a dissertation topic and learn that there was a Great Depression in 1946, a topic which he or she will then analyze using all the tools of modern economic analysis. The student will read that real groww national product in 1946 fell 19%, the largest single decrease in annual output in the century of recorded annual GNP data. He or she will also learn quickly that from 1944 to 1947, real output fell by 22.7%. Looking up population figures, the stuent will observe that per capita output actually declined by more than one-fourth in real terms over the three years of conversion from war to peace, and did not regain the pre-depression (1944) level again until 1964.

"From all this the student will no doubt conclude that the heretofore neglected Great Depression of 1946 was the worst cyclical downturn in modern American economic history, and that, by some measures, it had a greater disruptive impace of the American economy than the earlier, more celebrated Great Depression of 1929 - 1941. For example, in the earlier downturn, real per capita BNP surpassed the 1929 peak levels with 12 years, compared with 20 years it took to surpass the 1944 peak after the 1946 depression. Moreover, while the 1929-33 downturn wa quantitatively a bit larger (30% vs 23%), no single year exhibited a decline of the magnitude of that witnessed in 1946..."

1965 Night Cycle Economic Bubble Debt Deflation begins –
1983 Day Cycle Economic Bubble Credit Inflation begins

No decade has been more rife with social chaos, disintegration of the Patriarchy, racial division, financial uncertainty (both deflation and inflation at the same time: stagflation – and unemployment rates above 10%) -- the U.S. endured riots and burning cities, racial warfare -- and the U.S. lost its first war in Vietnam mainly because she had lost her identity, no longer believing in her 'heroic' mission to save the world for freedom and democracy (i.e., for capitalism). Capitalism and Patriarchy were under attack nationally and internationally. Communism was spreading in both eastern and western hemispheres.

The recession of 1973-75 was the worst recession since the 1930's. The inflation created by over-liquidation by the Fed led to sharp rises in the price of oil and gold.

The recession of 1980-82 was caused by Fed Chairman's Paul Volcker's ratcheting up of interest rates to try to make up for years of Fed quantitative easing.

2001 Night Cycle Economic Bubble Debt Deflation begins –
2019 Day Cycle Economic Bubble Credit Inflation begins.

Sep 17 11:25 AM

[Socialism c...:]

"What to buy? Forget about commodities. Long term, they are dead as an investment class. Depression = deflation, forget about other inflation fighting investments....Cash is king during deflation."

What??? How can you say this with a straight face? During a depression, I'd much rather have "things" in hand that I need or can trade, than cash! Commodities are never a wrong place to be -- the quantity just varies. Dead? Wow. They are particularly alive during a depression! All that matters will be having the needed *things* on the table, on your back, and flowing into the furnace in winter!

Sep 17 12:37 PM

[conceptwizard:]

No matter how you look at it, the economy is on the ropes. Yes, there should be a rebound in the next few quarters, but once the stimulus wears off, its back to the doldrums. According to David Rosenberg of Gluskin Sheff, "All the growth we are seeing globally this year is due to fiscal stimulus.... For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring."
The question is, how long can the Obama administration write checks on an account that's overdrawn by $11 trillion (The National debt) before the foreign appetite for US Treasuries wanes and we have a sovereign debt crisis? If the Fed is faking sales of Treasuries to conceal the damage--as I expect it is--we could see the dollar plunge to $2 per euro by the middle of 2010. Imagine pulling up to the gas pump and paying $6.50 per gallon. Ouch! That should be revive the economy.

For the next year or so, the demon we face is deflation; a severe contraction exacerbated by household deleveraging and massive financial sector defaults. The Fed's money-printing operations just can't keep pace with capital-hole that continues to expand from delinquencies, foreclosures, and failed loans. Workers have seen their credit lines cut and their hours reduced, households are $3 trillion above trend in their debt-to-equity ratio, and unemployment is soaring. Industry analysts expect a $1.5 trillion cut-back in credit card spending. That's why Bernanke is firehosing the whole financial system with low interest liquidity, to stimulate speculation and reverse the effects of a slumping economy.

Here's a clip from an article in the UK Telegraph:

"Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation...

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said. (Ambrose Evans-Pritchard, "US credit shrinks at Great Depression rate prompting fears of double-dip recession", UK Telegraph)

The Fed has pumped up bank reserves, but the velocity of money has sputtered to a standstill.

Sep 17 12:38 PM

[Mark Ciepiel:]

Why are you so confident that inflation will not occur, Alex? Aren't you concerned about stimulus diluting the dollar's value? Aren't you concerned about interest rates rising?

Sep 17 12:48 PM

[bob adamson:]

Mr. Filonov properly notes that globalization and the information technology revolution have created deep structural imbalances in the global economy which remain to be resolved. These structural imbalances are reflected in massif and unstable international trade imbalances (and their attendant international financial imbalances) which have built up over the past 10 years in particular. These ‘real economy’ imbalances have been greatly compounded by the creation of many trillions of dollars of notional derivative assets which were the purported foundation of much of the business and profits of the London and New York financial centres for several years prior to last year (much of which is now judged to be valueless).

The cumulative effect of the forgoing is that the global economy just barely avoided a chaotic and deep deflationary depression (financial toxic waste in the order of 20 trillion dollars became largely unsalable last fall and the banking system essentially froze). While massive government refinancing of the banks avoided the impending meltdown, financing of business enterprise remains shaky and much of the toxic waste remains to be accounted for let alone moped up. Of even greater importance in the longer run, not only the financial and banking crisis, but also the structural and trade structural imbalances remain to be addressed.

The current recovery is very tentative and largely based on monetary and fiscal stimulus by the G8 countries. The recovery needs to become firmly based in the real economy before that stimulus life support is withdrawn. Counterintuitive though it may seem, it is not yet time to reign in public spending even though massif deficits result. Arguably, it is not necessary that the structural and trade structural imbalances be fully resolved for the recovery to firm. However, the economy will go back into crisis in a few months or years if these imbalances are not being significantly addressed in the interim.

Arguably, because of these growing imbalances, the global economy has been experiencing business cycles of increasing amplitude and at shorter swing intervals. While globalization has had benefits, this manic/depressive tendency of economic life is its downside and information technology allows any panic to be instantaneously reflected world wide. Since the current economic crisis came to a head last year there has been an important division between the centre left and centre right on how we should respond to the deep downturn and where we should ideally be headed coming out of it. The left wants to protect employment, incomes and employment benefits and rebuild public infrastructure and social and environmental programs to both maintain and rebuild better balance (economic, social and ecological) and social equality; these being the measures of a healthy and sustainable economy and society. The right wants controlled ‘creative destruction’ of wasteful public and private social and economic institutions and accelerated shifting of economic focus to the healthiest sectors of the private sector promoted by deregulation and a lowering tax and public debt burden coupled with a greater embrace of globalization; these being the way to greater growth and individual freedom. This division was temporarily masked in the third quarter of 2008 and the first of 2009 as all embraced the need for short term stabilization of the banking sector and the shock stimulus of consumption. Now that (perhaps prematurely) it appears that the crisis phase has past, the right increasingly calls for a return to their core agenda while the left continues to see the need for both short term stimulus and a longer term drive to achieve the balance and equality described above. This debate is now front and centre

Unlike Mr. Filonov, I believe that the global structural and trade structural imbalances that underlie the current crisis need not be fully resolved for the recession to be lifted for the next 5 or so years provided that government stimulus measures are not prematurely ended and the G20 works diligently to manage and, over time, resolve those imbalances. There are also measures that each nation can take internally to better stabilize its own economy and I would like to conclude on this note. This is not the place for a lengthy proposal and analysis (nor do I claim to have some clear and detailed final answers). Here, however, is a brief bundle of suggestions that seem worthy of further development:
- The observation that the banking sector is comprised at its top by institutions (‘near banks’ as well as those formally recognized as banks) ‘too big to fail’ is not an excuse for simply accepting the need for periodic massive public bail-outs coupled with emergency but minimal tweaks to regulatory and capitalization rules. Such institutions are, because of their importance to society generally, more analogous to public utilities than a corporation of, say, $30, 000, 000 capitalization operating some restaurants.
- The role of the business cycle has been undervalued for many years while the predominant view was that monetary or fiscal fine-tuning could do the job (take your pick of short term tools from the ‘bastardized Keynesian’ or the purported Friedman tool kit). Renewed interest in the driving function of uncertainty in the economy as seen by Minsky, Akeroff and others helps refocus our perspective. Each country must therefore be prepared on short notice to intervene in its own economy, in coordination with similar action by other countries, to prevent excesses in business cycle swings from destabilizing the economy.
- Private employers have been forced to take on too great a responsibility for provision for the health, development and retirement needs of their workforce. The public sector must therefore (in intelligent, effective and efficient ways) take back from employers a greater part of this load leaving corporations freer to focus on their primary business functions. In other words, the public sector needs to organize and finance health, pension, education and training and ancillary benefits to assist citizens generally to manage their personal needs and leave the private employers better able to finance and manage their production and sale of products more efficiently and effectively.
- The aggressive efforts of the past to move functions from the public sector to the private sector must be rethought. As suggested above, there are areas where the public sector can develop to the benefit of both the citizen and the private sector itself if only the question is looked at afresh without ideological blinkers. One important benefit of a larger but fine-tuned and well managed public sector would be that it will also serve as a counterweight in the national and regional economy to buffer the local economic disruption of recessions. In short, risk and an appropriate level of private sector ‘creative destruction’ is beneficial, but not general disruption and chaos attendant on a deflationary depression vortex, and a public sector functioning on a different growth and pause cycle than that applying to the private sector can moderate the boom/bust effect on the general society without unduly shielding private sector industries and companies from the need to be efficient and effective.

Sep 17 04:22 PM

[Tony Daltorio:]

Wow - what a clueless article. Commodities and other real assets are THE place to be in the future. Increasing demand and very limited supplies tell the story.

Not in some fantasy technology stocks that are in a bubble - the ONLY exposure to tech should be a heavy short position. Most technology (like chips) is simply a commodity. But a commodity with limited demand and exponentially increasing supplies.

Sep 18 03:03 PM

[bob adamson:]

As of October 28th we are not in the Great Depression 2.0 yet (and will probably avoid it) but the signficant recession continues to be a challenge.

Oct 28 07:13 PM