Do depressions no longer exist?
Rather than dealing with the issues created by decades of ever increasing debt, we appear to prefer a policy of denial and repetition of the same mistakes.
Our politicians and central bankers appear to be playing a modern game of hide and seek, as poorly played by small children. I’m sure you have all witnessed a small child go and stand in the corner of a room with their eyes shut! Apparently, hiding in plain sight now passes for economic and political policy.
We are presently facing the following economic, political and financial tailwinds:
- Huge levels of debt built into every segment of our economy.
- The beginning of an ‘inverted economic pyramid’ of an ageing population, with too many needing to be supported by too few economically active.
- Huge numbers of people out of work.
- China’s monumental misallocation of resources (plus other’s misallocations towards China, and other country’s economies distorted by China’s misallocations).
- An enraged and deluded group of people seemingly hell bent on destruction in nearly every nation in the world.
- Arrogant military superpowers intent on playing out their war games on the world stage (no, not Russia and China as our papers would have you believe: America and Britain).
Despite these pressures, apparently everything can be solved if we just go out and flash the plastic. Let’s all go and shop, ignoring the entire circus of elephants standing on our high street. Nothing to see here!
Rather than economics being about observation of activity, it now appears to be about propaganda (perhaps it always has been). So instead of having an accurate observation of our position, we have the following Orwellian double speak and attempts at manipulating reality.
The Great Recession
As Murray Rothbard noted, depressions are out of fashion. What we have instead is a frankly ridiculous attempt to describe a severe depression, without of course actually using the word depression.
The great recession, what exactly was great about it? Do we describe Bush and Blair as great murderers? If we used an adjective such as terrible, then the use of the word recession would appear more suitable. Yet it would still be less accurate than calling it a depression.
A more accurate description would be a debt-driven, disastrous, depression. That will more closely resemble our reality than ‘the great recession’.
The Wealth Effect
Apparently, in order to build lasting prosperity get through the next earnings quarter/election; the ‘wealth effect’ is necessary. This is essentially the artificial pumping up of asset prices beyond their fundamental values so people feel richer than they are, and then use this new found ‘wealth’ to go out and consume money they don’t really have, financed by debt they will struggle to repay.
Nice idea, but here’s a better one. Let’s keep special effects for the movies and simply create real wealth.
It seems obvious to me, but excessive debt-fuelled consumption and speculation should warrant a compensating period of financial conservatism based on reality.
Our economists and politicians don’t want this. They appear determined to keep the illusion of wealth going. Heaven forbid the general public see the reality of their situation, and perhaps logically stop spending money on things they don’t need, with money they don’t have.
Global Financial Crisis
We already talk about the ‘global financial crisis’ like it was some remote, one-off event, and not something that is still ongoing which we’ve yet to escape from. European Banks look so flimsy; the only people I would be happy to see bank with them are ISIS (which is a little ironic when you consider all the anti-money laundering bureaucratic hoops we have to go through in order to manage our accounts). European Banks appear one mishap away from another existential crisis. And the way central banks have attacked the yield on financial markets; insurance companies and pension schemes could soon join them.
Do you remember all the talk about green shoots at any slight improvement in economic data? You can’t really blame people for clinging to any small positive sign when it feels like the world is falling apart (let’s face it, it felt that way in 2007-9). Unfortunately much of it appears to have been false hope. It turned out to mean let’s go out and just take on more debt (after the crisis caused by having too much debt!).
Here is what has happened since the supposed end of the GFC and all those green shoots:
- After our broad monetary base went on a forty year tear (reflective of the ever increasing amount of debt coming into our lives and economy), since 2008 it has taken a mild pause, with a tentative decline. This is what has got central bankers worried, and yet the preceding forty years of exponential credit growth was completely ignored? Perhaps if they paid a little more attention towards preventing the first chart, the second chart would not be very important.
- The Bank of England base rate has been taken to historical lows from 5.5% in 2007 to a pitiful 0.25% today. Hardly a signal of financial and economic strength.
- Global debt has grown by $57trillion since 2007.
- UK government debt has grown from 51.9% to 90.6% of GDP. So much for austerity. Could you imagine the uproar if we actually ran a balanced budget?
- Emerging markets have gone on a corporate debt binge, with the total debt quadrupling in a decade! This has mostly been driven by the availability of credit at lower rates. So one of the results of central bank monetary policy will be for many emerging market corporations to borrow themselves into bankruptcy.
- China has been the poster child of this debt-fuelled insanity. It’s rumoured to be worse than US sub-prime debt which triggered the world shaking financial crisis. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. There is no other conclusion to draw other than pending bankruptcy for large parts of the Chinese economy. And the result of this debt binge? Huge misallocations of resources. China now has steel overcapacity of about 300million tonnes and cities no one lives in! What a complete waste of money, time, energy, natural resources, effort and the environment.
The green shoots light at end of this tunnel just might be an oncoming train! Hopefully not, but it appears to me that financial folly has simply given way to economic madness. I don’t want to predict doom, but I’m predicting we need a healthy dose of sheer luck to escape from this debt mess unscathed.
We have always been guilty of fudging our figures. ‘Lies, damn lies and then there are statistics’ will always ring true.
However there are two statistics commonly reported in the news that are so misleading they need highlighting.
The quoted unemployment rate is 4.9%, or 1.64million people. This is the rate of people actively seeking employment between the ages of 16-64. I don’t recall a time when this wasn’t fudged because the true level of people out of work is far greater.
The true unemployment rate is those aged 16-64, who are seeking work, plus those deemed economically inactive (i.e. not working). Clarifying it this way, there are 10.48million people unemployed. As a proportion of the total UK population, we have a 16% unemployment rate. Measured against our working age population (those aged 16-64), it is approaching an unemployment rate of 25%.
Our employment picture is also becoming worse due to the increasing number of people ageing. We are at the beginning of the ‘baby boomer’ retirement wave, which will make many countries, particularly Japan, look like old age colonies.
In 2007, 66.65% of the population was of working age, but this has declined to 64.92%. As more people age, there will be lower numbers of people having to support the ever-increasing amount of people economically idle.
Our solution to this appears to be:
- Ignore the problem.
- Bring in more people to support all our pensioners.
It seems clear to me that large-scale immigration from poor to rich countries causes more problems that it attempts to resolve, especially when too many of those we bring in want to live in some form of barbaric existence, or blow us all up. Let’s face reality, bringing in people from places such as Somalia is hardly going to lead to ever increasing prosperity.
As immigration will not resolve our problems, we better hurry up and make robots that can do most of the work for us. These innovations are happening, however it remains to be seen whether it will come soon enough to save us from the huge economic pressures of idleness.
In 2010, the government changed the measurement of inflation from the retail price index (RPI), to the consumer price index (CPI).
RPI includes housing costs and mortgage repayments (you know, that expense everyone has). CPI excludes this (I suppose because it inconveniently increases the inflation rate). CPI is also calculated using a formula that takes into account people choosing to consume lower priced (and lower quality) goods when prices rise.
But just because we have fiddled with the figures, is real world inflation any different? For example, if the price of beef became too expensive, we would eat less steak and consume more burgers. But my issue with this is surely we should be measuring this decline in our prosperity (and therefore use RPI)? If we can’t afford steak, but can only afford burgers, we are becoming poorer due to inflation (and CPI doesn’t measure this but ‘massages’ the data to make the true situation appear better than it is).
Since 1989, the average difference between CPI and RPI has been 0.70% pa. That doesn’t appear like much, but compounded over a period of time, the difference is huge.
For example, let’s say you have been promised £10,000 a year in your pension in 20 years time. It used to be linked to RPI, but now it’s linked to CPI. That 0.70% pa difference is an extra £1,500 a year you won’t receive in retirement.
CPI is also used to link wages and other benefits. This statistical fraud will secretly and gradually make you poorer. No one likes watered down wine. How long will it be before people notice this inflation difference in their pockets and start shouting ‘give me back my steak’!
I fully understand that talking about the problems we have is negative, and we need optimism about our situation and the future. However that optimism must be based on reality. We cannot simply ignore all of our problems and hope they will go away. It appears to me that is exactly what we are doing. Any form of negativity or criticism appears publicly outlawed in our plastic, popular, cheerleader world.
There are of course notable positive developments in our economy, and for the most part these are technology driven (automation), although I am more excited about the biological advancements which may be on the horizon (life preservation/health improving).
However, we can’t escape from the uncomfortable truth that our huge debts are all with the existing economy. We are in a strange perilous financial position where the essential innovative creative/destructive progress of entrepreneurial capitalism could cause a little more destruction than creation. The displacement of existing companies and workers to make way for better alternatives may cause too many short-term financial and economic losses, the impact of which we are scarcely in a position to withstand.
I recently had the pleasure of reading ‘Never a Dull Moment: A Libertarian Look at the Sixties’, a recently put together collection of some of the late Murray Rothbard’s writings.
I have included below my favourite chapter from the book, which you will notice inspired me to write this article.
Down to the late 1930s, when the economy turned downward and economic activity slackened, all economists called such periods depressions — and the public knew that, whether the periods of contraction be mild or severe, they were depressions. Period. But then, when the patent medicine nostrums peddled by the New Deal to end the depression of the early 1930s led only to another severe crisis in 1937, the Brain Trusters of the New Deal decided that if they could not fix up reality, they could at least juggle its labels. And so depression miraculously became recession.
Depressions were henceforth banished from the land, never to return — by definition. From now on, every economic contraction was to be called by the much milder name of recession. The result was that while depressions were magically banished, we began to suffer a whole series of recessions, dips that seemed suspiciously like the obsolete depressions: in 1948, 1953, 1957, and 1960. After the lengthy boom from 1961 to 1966, one of the longest in American history, our economic managers began to trumpet the idea that recessions, as well as depressions, were a thing of the past, victims of the “fine tuning” management of the wizard regulators and controllers of the New Economics.
What a shock, then, when the economy began inexorably to dip and contract again toward the end of 1966! Was reality again about to destroy the cherished vaunting of the nation’s Brain Trusters?
But no! Lo and behold! Euphemism and name-juggling came once again to the rescue. Recession, too, appears to have been banished by definition. Our economic pundits could not deny that their own statistics revealed a considerable downturn in the economy: in housing and construction, in corporate profits, in capital good investments and industrial production — in short, in all the accepted indicators of what is happening in the economy. But this contraction has not, heaven forbid, been called by the term “recession,” which is now too harsh for American consumption.
We have suffered, since late 1966, from a “rolling readjustment,” a “sidewise movement,” or “a pause” — depending on which expert you read. But don’t let them kid you: we’re in a solid, old-fashioned recession — if not depression — though obviously not a particularly severe one. It is possible that when, as seems likely, we pull out of the recession toward the end of this year, the nation’s economists and managers will admit that we were in a recession — but that now things are fine and getting ever better. Or, it’s even more likely that the word recession will be quietly buried forevermore.
So now we have to worry about “pauses” or “readjustments.” The best way to beat this flim-flam is in the spirit of the angry boy in the old New Yorker cartoon: The mother pleads with the boy: “Eat your broccoli, dear.” To which the lad replies: “I say it’s spinach, and I say to hell with it!”
It appears clear to me that despite debt pumped GDP figures, we are still in the throes of a huge depression and we haven’t even began our journey back towards reality. My own spin of the above quote pretty much sums up where we are economically:
“Here’s some credit, Mr. Consumer,” to which Mr. Consumer replies; “I say it’s debt; and I have enough of that already!”