There are two options before the US economy for the next period says Ruchir Sharma (‘The best hope is stagnation’) of Morgan Stanley Banking in Newsweek, November 3. Being another banker spawned by the system, it is natural that he cannot see options outside nor think beyond the capitalist box; but he does make a persuasive point within the box when he points out that there are just two previous crises of capitalism comparable in scale with the Great Crash of 2008 and its evolving outcome. These are the Great Depression (GD) and the Lost Decade (LD) in Japan. Let us briefly recapitulate the differences between these prototypes.

GD and LD

The GD is so well etched in the historical record that no introduction is needed. Sharma’s focus is that from October 1929 to March 1933 there was a great purge in which banks collapsed, farms, industries and commerce shut down, and unemployment rose to 25% as uncompetitive enterprises went to the wall. The key is that capitalism purged itself of weaklings in a Malthusian massacre as Herbert Hoover implemented the advice of Treasury Secretary Andrew Mellon that economic weaklings needed to be liquidated. Interest rates, monetary policy and fiscal measures remained passive, indifferent to the woes of ailing banks and companies. When Franklin Roosevelt launched the New Deal in March 1933, pouring government money into infrastructure projects and employment creation, he did so having inherited a lean and clean capitalism.

Japan’s so-called Lost Decade refers to the period starting 1990-91, though the downturn has much longer than a decade and stretches right up to the present - there have been brief upturns in between. Japan has suffered stagnation, stock-market doldrums, debt ridden banks and a dismal psychology for most of the last two decades. The Nikkei peaked on the last day of 1989 at 37,000 points, it still trades below 9,000, Japan’s debt-to-GDP ratio Sharma says has remained over for 300% for two decades - in the US government debt is 77% of GDP, yet Americans are screaming that their children’s future is being mortgaged! The Japanese economy has grown only 25% in the last two decades. (The debt that Sharma refers to is probably national and private together).

Sharma correctly attributes the different trajectory in Japan to the fundamental strategic dissimilarity that Japanese corporate and political powers adopted from the early 1990s onwards. The difference from Hoover-Mellon inaction was that Japan went all out with a rescue package to save banks, stimulate the economy and overcome the debacle in the bloated real-estate bubble of the 1980s. "Far from attempting to liquidate the weak, Japan did everything it could to save them", he says. The BoJ lowered interest rates to below 1% - sometimes to zero - it conspired with banks to hide bad debts, took ‘toxic’ assets off their hands, and injected monumental amounts of liquidity into failing banks. Japan avoided a depression; instead it inherited permanent stagnation. To this day rotten eggs survive in the financial basket and drag all Japan down with them.

The Austrian School verses Obama’s options

The ‘Austrians’ as they are called are the purists among classical economists; true theoretical believers in the efficacy of free markets, opponents of state intervention and regulation, and enemies of socialism, populism and the working class. The schooltheoretical foundations go back to Carl Menger (1840-1921), and more recently Friedrich Hayek (1899-1992) who greatly influenced Regan-Thatcher neo-liberalism. The ‘Austrians’, as expected, extol the Hoover-Mellon policies of the first phase of the GD. Quite interestingly, there is one point on which the ‘Austrians’ and the Marxists hold parallel views, at least on the surface; that is the inevitability of boom-bust cycles in capitalism. The ‘Austrians’ explain that such cycles are a natural dynamic of capitalism and should be allowed to play out their role without interference by the state. They would point to the LD as an example of what happens when there is excessive messing around. Marxists too say that capitalism’s periodic crises and collapses are inevitable, but arise from the fundamental contradiction between the socialised character of production and privatised nature of appropriation; transform this antiquated social order they declare. Nevertheless, between ‘Austrians’ and Marxists there exists an interesting but superficial ‘unity of opposites’!

The strategy that governments, central banks and the IMF, with the cooperation of near ruined international finance capital used these last 15 months to check the crash are almost word for word the approach that the Japanese Government and BoJ adopted in the 1990s. Theoretical purists decry the measures that are now being taken and want the ‘global-state’ to get out and stay out of the economic domain. More pragmatic thinkers, still within the ‘Austrian’ fold, accept the need for rescue of the banking system but want interference to be kept to a minimum; certainly they are opposed to anything like a stimulus package (that horrible man Keynes!) or anything that might be inflationary.

The world’s political and institutional powers have absolutely correctly sensed that to go the ‘Austrian’ route would be to court political disaster - social unrest, even revolution. The world and its people are so different now from the 1930s that there will be an overthrow of the state in America and Europe if conditions similar to the Great Depression were to be repeated. That time round capitalism’s legacy to mankind was fascism and World War II, this time it will be popular power. The Dow Jones Industrial Average did not regain its 1929 pre-crash high till 1955, nor did sustained economic growth in the US commence till 1939-40. The New Deal was inadequate to restore capitalism to its former glory; war and its industry of carnage were needed to liberate the system from its economic depths.

But Obama is neither a leftist nor an adherent of right-wing economic theories. If one had to stick labels the best would be pragmatic populist and meritocratic intellectual, within the limits that populism is permitted in the USA. The ‘Austrian-way’ is out of the question in his case, he has to follow where Brown, Sarkozy, Paulson and Bernanke have led - rescue and stimulate. Sharma accepts this, and his prescription can be paraphrased: ‘Face it guys, accept that you are in for a lost decade of economic stagnation’, and may I add, this time it will be global. I will not advert to my thesis of global, partially-decoupled, depression again, but if the next decade in the West is not depression doldrums but stagnation economics, then the parameters for Asia and Latin America have to be reworked - but that’s a topic for another day though China has just announced a $586 billion domestic demand creation package.

On November 7, following a meeting of his economic transition team, Obama, at his first press conference, announced a commitment to a major economic stimulus package; Britain and France have also made similar decisions. It seems to be the season of reincarnations - J. M. Keynes in Europe and America, Marx globally.

Time’s arrow

There is a theory that Democratic presidents shift to the right after election-day and conventional wisdom is that young Hussein will see the light after 20 January 2009, if epiphany did not dawn on 5 November. It is not my job to stimulate false hopes of a transformative presidency; rather I would like you to consider how unusual the circumstances in which Obama assumes office are. None will claim that the prevailing social and economic paralysis is comparable to the calamity that greeted FDR in 1932, and a meltdown of international banking has been averted by coordinated intervention of the ‘global state’, but a lost decade in the global real economy, hitting businesses, jobs and households is unavoidable. The only argument is how deep it will be and how globally widespread; there is a consensus that it will be prolonged.

Nevertheless, American society is far different today and the people who came out on the streets on the evening of November 4 were young, of many colours and educated. This is the modern face of populism and cynics will remind us that so oft the populist genie has come out of the bottle and frolicked on the streets, only to fizzle out afterwards. They will point to the fickleness of Peoples’ Power in the Philippines, and the 1989 Tiananmen Square student uprising which ended as a damp squib, its leaders assimilated into the Western establishment.