Recessions come in different shapes and sizes; some even fester into depressions which are acute, prolonged and global downturns with cruel unemployment, bank collapses, factory shutdowns, and home and farm foreclosures. A V shaped recession is when the recovery is fast, the downturn sometimes reversing even in as little as six months, while a U is what you might call a nice respectable recession – a bad flu, a decent period on antibiotics followed by a confident recovery. The W is mainly of theoretical interest, a double-dip recession, or historically, the double-dip Great Depression of 1929-1933 followed by the 1938-1939 relapse. The front of the J is left undefined; the late 1960s to late 1970s period was known as stagflation – poor growth plus high inflation, a theoretical oddity for economists. As you must have guessed the recovery was strong after 1982 when Regan and Paul Volker deliberately engineered a recession in the US to force down wages, curtail social benefits and control inflation, regaining capitalist dominance of the economy and clearing the decks for a two decade dominance of neo-liberal Reganomics. Thatcher achieved the same result by different means; confronting populism and smashing the unions.
The L goes down and stays down
The great majority of commentators and economic gurus in the West, and recently in Japan, China and Hong Kong as well, now admit that their hopes for a recovery in 2009 lie buried under a pile of red-ink soaked corporate balance sheets and international trade stats with missing trailing zeros. The wise now mourn that the US and European recession, and adverse American budget and balance of payments deficits, will worsen sharply throughout 2009; only the brave forecast sunshine even in 2010. That’s what you call an L; it goes down and stays down, shrivelled by age and withered by excess; or, if you prefer, overgrown with credit and bloated with property bubbles. Japan’s Lost Decade (actually about two decades), sparked by the property and stock market collapse of 1990 was an L shaped recession. The Japanese economy has since never really come out of the doldrums.
Having done it so often, I do not intend to inflict on you another inventory of collapsing finance houses and near bankrupt companies; America’s iconic auto industry included. You have read all about it ad nauseam in the global media and I have dutifully copied much of it for you in year 2008. I will add only two recent examples to show how the financial world is continuing to collapse.
Citigroup last year had a $45 billion handout and Uncle Sam underwrote crappy assets worth $306 billion. Still, the just released accounts show a loss of $19 billion in year 2008. Citigroup is now to be broken into two; Citicorp will take over the banking business while all the shit will be piled into Citiholdings, eventually perhaps to be offloaded onto the state. That’s how vibrant and efficient capitalism is! Bank of America, had a $25 billion bailout last year, but has failed to recover. Now another $20 billion cash injection and $118 billion worth of guarantees for faecal holdings are to be provided from public funds. These are the two greatest, biggest, mightiest, choose your adjective as you will, public banks in the United States. Similarly GM, Ford and Chrysler are the very emblems of the American way of life.
Living way out here in Lanka we just don’t get it, insulated as we are by the natural time lags and little cushions that ameliorate the spread of cataclysmic happenings from the metropolis to the periphery; but look its real, Book of Revelations and all.
What they say
Obama did not mince his words at the inauguration but it was couched in diplomatic speak, so let’s see how economists give it straight from the shoulder. Now this is not Marxist me raving, this is them whose pristine bones are not corrupted by one improper leftist marrow or fibre. (All sources can be found by typing the name and a few key words into a search engine, or when a magazine is named, in the hard copy).
Martin Feldstein, the former president of the National Bureau of Economic Research: "The current downturn is likely to last much longer than previous downturns. We will be lucky to see the recession end in 2009,"
Nouriel Roubini in Foreign Policy: "The global financial pandemic is now upon us, but we are only in the early stages. My predictions for the coming year, unfortunately, are even more dire. The bubbles, and there were many, have only begun to burst. The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short."
Carmen Reinhart, University of Maryland and Kenneth Rogoff, Harvard University, make the following predictions: "Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing prices will decline 35%, stretched over six years, and equity 55% over three and a half years. Second, the aftermath of a banking crisis is associated with profound declines in output and employment. Unemployment will rise 7% over four years and output fall 9% from peak for two years. Third, the real value of government debt will explode 86% above the post-war average. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as fiscal policies aimed at mitigating the downturn".
Walter Derzk ridicules economic optimists who divine that the recession will accompany year 2009 to the exit: "These are the same people that up until the fall of 2008 were all in total denial that the recession was in fact a reality. What’s their justification for their Pollyannaism? Obama’s stimulus package will be enough to breathe optimism and hopefulness back into stock markets, get people investing in equities and to get banks lending to the same people that got into debt in the first place. Look more closely and you’ll find that these are all people who work for banks, investment houses, derivative funds, and stock brokerage firms who have a stake in you not taking your money out of your accounts or putting more of your money back into their accounts. Their pay checks and careers depend on creating a rosy picture, not a realistic picture".
Elizabeth Warren, Harvard Law professor, and researcher into ‘the middle class’ speaks thus: "(T)he coming collapse of the middle class . . . the consumer is maxed out and the middle class in the US is shrinking, turning into an underclass".
My intention is not to scare the pants off readers but to say: "Prepare for a long period of hardship". There is a time lag after developed economies hit the nadir before the worst reaches countries such as ours because ours is an economy less exposed to the vicissitudes of global finance, markets and trade, and the large rural sector is relatively self-reliant. Eventually however, reality will catch up as exports (garments, tea, rubber, gems, spices, and SME products) decline and prices tumble; tourism and other services will also be affected. Rising unemployment and a reeling urban and plantation economy, that is the formal money economy, will eventually take its toll on rural society as well. The aforementioned time lag could be as long as an year and there are no studies I am aware of to show how deep the effects will be nor how profound the multipliers. It’s just sensible to be prepared for hard times and build personal and national reserves.
A Marshall Plan in reverse
The most profound global economic event we are living through is the bankrupting of America. In round numbers current US government debt is about $10 trillion, US foreign indebtedness, that is Treasury and corporate bond holdings together in foreign hands, are between $3 trillion and $5 trillion. These are astronomical amounts but the frightening thing is that the stimulus package that was launched in September 2008 and which will continue under Obama requires increasing the former by about $ 3 trillion and the latter by about half that amount. America will have to borrow and print to fiancé the stimulus. However, reckless borrowing will undermine the US Treasury bond (a different way of saying the end of the world as we know it now) and if Bernanche keeps the press rolling all night he will undermine the dollar globally and at home inflation will take off and hit the roof. But Obama has no choice but to take on massive economic stimulus unless he intends to court Great Depression Mark II; heads or tails he loses.
Ambrose Evans-Pritchard says in his personal web page on 19 January that the bursting of the U.S. Treasury bond bubble is just waiting to happen "as the greatest sovereign bond bubble of all time rolls into 2009. Yields on 10-year US Treasuries have fallen to 2.4% – a level that was unseen even in the Great Depression. It is much the same story across the world; yields are 1.3p% in Japan, 3.02% in Germany, 3.13% in Britain, 3.26% in Chile, 3.47% in France, and 5.56% in Brazil". For the layman, falling bond yields equate to rising bond prices as investors dump other instruments and fly to the safety of the full trust and confidence of paper issued by Washington. But the real yield on US Treasuries is perilously close to negative, in Japan it is negative.
And then suddenly, as is usually the case in these events: Armageddon! Will Washington at some point find itself unable to service its Treasury bonds? Will local and overseas investor confidence collapse? Will foreign central banks and private investors at home and abroad, suddenly dump, forcing America to declare default on its sovereign bond? An end of the world scenario!
Astonishing proposals are being prepared to put off this day of reckoning. Ambrose Evans-Pritchard gives this example: "Akio Mikuni, head of Japan’s credit agency Mikuni, has called for a "Marshall Plan" to bail out America by canceling $980bn of US Treasury bonds held by the Japanese state. This debt jubilee does have the merit of creative thinking, but it is entirely designed to keep the old game going. "US households won’t have access to credit they have enjoyed in the past. Their demand for all products, including imports, will suffer unless something is done," said Mikuni". Of course though Mikuni politely referred only to Japanese holdings, the much larger Chinese and Petro Middle East holdings are more to the point.
So the world may have to cancel America’s debt and bail her out if things are to go on in the same old way; that is, profligate living and spending, declining competitiveness, and burgeoning public and private indebtedness until next time round. Fairy stories! Just you wait and see!