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You Are Here: In the Pit of a Depression

june-payroll.thumbnail.jpgRead it and weep optimists. A month ago the "green shoots" narrative was everywhere. Those "green shoots" have been eaten by the panda, and squashed flat by speculators in resources. It is time for Congress to wake up, and smell the depression. The only post-war downturns comparable to this one in severity are the 1948-49 recession, which was thought of as "mild" because it was compared at the time to the Great Depression, the 1937 Recession, and the Demobilization Recession. 

It is useful to compare the present downturn with the 1948 recession because there are parallels in the numbers, both here and abroad. First, both were driven by money drying up: personal consumption rose in the 1948 recession; what dried up was private investment and inventories: they fell by 14.7% and 12.6% in 1949 respectively, but then bounced back by 21% and 13.7%. That’s what a crisis of confidence looks like. The 1948-49 recession was a test of what was then called "The New Economy:" driven by consumer demand, automatic stabilization, internal combustion engines, and a population spreading out through the country. The present downturn is the failure of that economy, now 60 years old, in the face of changing circumstances.

But in 1949, investment was internal; foreign capital was not driving the US economy anymore. In 2009, foreign capital is our life blood. This is why protecting the financial players, the banks and insurance companies, dominates all else in Congress and the current administration. The major argument among serious people is how, exactly, to keep the large pools of money flowing. The 1949 recession was, essentially, the coming of age of an era of consumer demand, which the 2000’s killed by stressing it beyond its means.

The problem now is an effect which has been in place since 2004. Everyone knows that any recovery led by US consumer spending, or Chinese infrastructure spending, goes through a few places, such as oil. Money is now parked in those places: credit, resources, and oil. Prices are higher and so bid-up, that a single rogue trader can spike the price of a benchmark grade of crude. The internal control of investment and the deep pool of pent-up demand that kicked the "Free World" out of the post-war funk is now reversed. Demand is sated, or over-supplied, and the money is not coming from inside, but outside, of the developed world’s economic structure.

The "global imbalances" are not between exporting and importing countries; but between countries that spread their demand through the society, and those who keep it tightly locked in the top. As the United States has borrowed more and more money from such countries, it has become more and more like them economically. Bad money drives out good money, and bad markets drive out good markets. 

The pressures this creates, in, for example, Iran, are building up. It is not possible for China, Saudi Arabia, and other under-developed nations to withhold the fruits of global growth from their populations forever. At the same time, it is not possible for the US to consume more than it produces forever. The question has been how to manage this transition. And, as yet, there is not the political courage to accept the answers. 

Consider one of the key changes: carbon dioxide emissions, and the decarbonization of the global economy. The US is putting forward a cap and trade scheme which is really protectionism in drag: the permits are being given away, and yet the US is hoping to impose a carbon tariff. While in theory, this is not against the WTO’s rules; in practice the carbonizing nation of China, is going to object. Tariffs have an attraction because they are unilaterally enforceable, they protect domestic industry, and they raise revenue without directly taxing individuals. They also allow the US to export carbon creating capital and goods without fear of a general tax on carbon, as the Keynes-Pigou-Tobin route would take, and without taxing flows of capital, which are part of the financial play. In short, they fall on production, not on finance; and they can be imposed, rather than negotiated. The problem, of course, is that WTO’s environmental exception is hard to hit, and China can fight the tariffs, or impose its own, anytime it desires to do so.

Until this kind of logjam, where what needs to be done cannot be done because of the pre-eminence of keeping the financial system above and outside of the law, is broken, the present economic stop and start will continue: long hiring depressions, followed by larger and larger downturns, that return back to full employment more and more slowly. This is because oil, the driver of the old "New Economy," is getting ever scarcer; and global warming is creating ever larger and more measurable effects. Sheep getting smaller on a remote Scottish island are going to be the least of our worries soon.

The "You Are Here" sign should tell people that we can’t afford the next downturn to be larger than this one. But unless political will develops, that is exactly where we are headed.

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