Since the economic crisis broke earlier this year this column has never knowingly understated its severity. But I make no apologies for having dwelt on doom and gloom. For most of 2008 government, regulators and monetary authorities were in denial about the severity of the crisis. We were repeatedly told that the end was in sight, that the economic fundamentals were sound, that Britain was well placed to ride out economic turbulence. Well, now we know.
However, there is a point beyond which realism turns into negativity. The danger now is that this pessimism becomes self-reinforcing. Indeed, the difference between a deep recession and an economic depression is, as the term suggests, largely psychological. Beyond a certain point people begin to lose hope of any recovery and a negative feedback loop stifles economic activity. So, as we end the most dramatic year since 1929 we really have t to start thinking now about the economic recovery that will eventually come.
Unfortunately, it isn’t imminent. The Chancellor’s forecast that Britain will emerge from recession late next year is about as likely as Speaker Michael Martin admitting he has made an error of judgement. We face a long and lean time while the economy works through the excesses of a credit boom which lasted over twenty years. However, this doesn’t preclude a stock market rally sometime in the New Year. Indeed, the chances are high that there will be a turnaround in the markets in 2009. Shares are extremely cheap by historic standards and there is a lot of cash sitting on the sidelines of the global stock-markets which is earning next to nothing because interest rates are so low.
This rally will not indicate the end of the financial crisis, or even the beginning of the end. Contrary to myth, the Great Crash of 1929 wasn’t a single event but a series of shocks spread over eight years after a succession of bear market rallies. Slashing rates to zero could even ignite another economic bubble or two – though that is something we should dearly wish to avoid. The global commodities bubble, which has just burst in spectacular fashion , was almost entirely a result of the US Federal Reserve slashing interest rates in America at the end of last year. Oil rose to nearly $150 a barrel; now it is forecast to fall to $25.
The 2008 Crash was in reality the bursting of succession of bubbles: a credit bubble, a property bubble, a commodities bubble and even an emerging nations bubble. Never in history have so many asset classes collapsed at the same time and across the globe. Everything has been marked down, from oil to house prices, from gold to shares. This is why the crisis is so profound. It is the first truly global synchronised economic collapse – a product of the internationalisation of financial markets and the growth of world trade.
However, the good news is that when the recovery begins, it is also likely to be global, and co-ordinated. The nations of the world are now linked together through trading and financial markets as never before in history. Only if there is a return to outright protectionism – to countries protecting their industries by tariff walls – is this global network of economic linkages likely to be broken. Which is why it is so important for bodies like the G20 of leading nations to promote free trade at the same time as seeking to control and regulate international financial markets. New products are being created all the time, in everything from life sciences to robotics, which will provide the markets for the future – provided they can get to market.
However, free trade must also coincide with a commitment to social equality. The huge disparities of wealth which had been allowed to develop both within and between nations during the bubble years are a large part of the problem. American consumers are in a debt crisis largely because middle class salaries have stagnated for the last decade as the top one percent of US citizens has acquired disproportionate wealth. Rich people do not spend most of their money; they invest it in assets like houses and shares, which boosted the bubble economy.
The New Deal in the 1930s coincided with a very great increase in taxation on wealth. It was this redistribution that allowed the consumer society to be created out of the wreckage of the Second World War. The economy boomed in he 50s because ordinary people could afford to buy things. Even poorer countries like China and India today, which have been investing much of their sovereign wealth in US bonds and mortgage assets, need to develop their own consumer markets to recycle their foreign earnings. Otherwise we will just have yet more asset bubbles.
Of course, this doesn’t mean we can afford to go back to the hyper-consumerism of the recent years. The noughties will go down in history as the dumbest boom in history, as we squandered the world’s precious resources shipping across the world huge quantities of toys and trinkets that we didn’t need, and mostly didn’t want. The new consumer industries will have to be environmentally sustainable and focussed on conserving rather than exploiting natural resources. There is no law that says economies have to built on the irresponsible burning of fossil fuels.
Indeed, the markets that will provide the impetus for the economic upswing in the 2010s will largely be in the field of renewable energy and conservation. These will be immense markets because they are environmental imperatives. We really don’t have any choice but to combat climate change, which is now happening faster even than the worst pessimists believed possible ten years ago. The economic effort that will have to be mobilised to restore the climatic balance of the planet will bring even the deepest economic depression to an end.
In truth, it wasn’t the New Deal in America that ended the Great Depression, it was the Second World War. The Keynsian reforms introduced by governments across the world after 1932 helped, but mass unemployment continued until America and Europe began rearmament programmes in the late 1930s. Well, the challenge today is not European war but the threat of planetary extinction. This will again force governments to override market mechanisms in order focus on the greatest challenge humanity has ever faced.
Well, no one said recovery was going to be easy.