February 27, 2012 RSS Feed Print
James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisisfrom Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.
The late summer and fall of 2011 was filled with fears of a double-dip recession in the United States coming hard on the heels of the 2007-2009 recession, frequently referred to as the Great Recession. With improved economic news lately including lowerunemployment, lower initial claims, higher growth, and higher stock prices, this recession talk has died down. That's why Lakshman Achuthan, the highly respected head of the Economic Cycle Research Institute, caused a stir last week when he repeated his earlier claim that a recession later this year was almost inevitable despite the better news.
Achuthan makes the point that improved news on the employment front is a lagging indicator from the end of the last recession and doesn't reveal what's ahead. He adds that higher asset prices in stocks and housing are the expected result of Federal Reserve money printing and don't say much about fundamentals. To make his case for a new recession, he focuses more on year-over-year growth in GDP versus the more popular quarter-over-quarter data, and indicators like changes in industrial production and personal income and spending.
There's another way to view the economic data since 2007 that casts all recession analyses in a different light. The better analytic mode is to bring back a word mainstream economists have abandoned—depression. When you realize the world has been in a depression since 2007 and will remain so indefinitely based on current policies, talk of recession, double-dip, and economic cycles is seen differently.
Economists dislike the concept of depression because it has no well-defined statistical meaning unlike recessions that are conventionally dated using well-understood criteria. They also dismiss the word "depression" because it's, well, too depressing. Economists like to think of themselves as master manipulators of fiscal and monetary policy levers fully capable of avoiding depressions by providing the right amount of "stimulus" at just the right time. They tend to look at a single case—the Great Depression of 1929 to 1940—and a single cause—tight money in 1928, and conclude that easy money is the way to ban depressions from the business cycle.
The Great Depression featured a double-dip of its own. Within the start and end dates of the Great Depression, there were two recessions, 1929 to 1933, and 1937 to 1938. In the Keynesian-Monetarist telling, the first of these was caused by tight money, the second was caused by a misguided effort by Franklin Delano Roosevelt to balance the budget. Hence economists added fiscal deficits to their tool kit along with easy money as the all-purpose depression busters. Easy money and big deficits are said to cure all ills. President Obama and Fed Chairman Ben Bernanke are following this script to a "T".
While tight money in the United States almost certainly contributed to the Great Depression, there were other causes including war reparations owed by Germany and war debts owed by England and France. These massive unpayable debts combined with a mispriced return to a poorly constructed gold standard restricted global credit and trade and caused deflationary pressures. This world-in-debt condition closely resembles the world today where overleveraged financial systems in Europe, the United States, and China are all trying to deleverage at once.
Less studied than the causes of the Great Depression is the equally interesting subject of why it lasted so long. The best explanation for this is found not in monetary or fiscal policy but in what economists call regime uncertainty. As FDR skittered among price supports, gold confiscation, court packing, and other ad hoc remedies, business executives waited on the sidelines until some consistency and certainty in policy developed. This situation is also the same today. Will the Bush tax cuts expire or not? Will Obamacare be upheld in the courts or not? Will payroll tax cuts and unemployment benefits be extended? Is corporate tax reform coming? This list goes on with the same effect as in the 1930s. Business investment will remain dormant until some certainty returns and, on current form, that may be years away.
Recessions inside a depression are completely different phenomena than typical business and credit cycle recessions. They are the result of behavioral shifts in a larger wave of deflation and deleveraging. Velocity, or turnover, of money drops faster than the Fed can print. The Fed can try dollar devaluation and other gimmicks but the dominant mode of deflation prevails until debt is destroyed, assets are revalued, and business investment finds a hospitable climate. We now confront the toxic twins of deleveraging and regime uncertainty from the 1930s while the Fed applies the inflationary remedy of the 1970s. This standoff between printing and precaution can continue for decades.
With business investment on hold, regime uncertainty rampant, fiscal policy at the limit, and monetary policy impotent, the depression will simply grind on with below-trend growth at best and periodic decline at worst. Paul Simon put it best in his song "Allergies" when he sang, "We get better, but we never get well." That's what a depression is. Occasional growth notwithstanding, we simply never get well.
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