In contrast to my rather optimistic take on the investing future, today let's look at a more gloomy assessment of the next twenty plus years. So here goes.
We often hear that our current economic period is the worst since the Great Depression of the 1930s.
As if that's not bad enough, now comes a British author of the book "The Long Depression: The Slump of 2008-2031" to warn us that this time may be even worse than the 1930s. Matthew Lynn believes the parallels with the 23 year long global depression that began in 1873 are reasons for concern.
Lynn's views are worth considering, if only to learn why he believes what he does.
This slump won't end until 1931 is subtitled 'Commentary: Our predicament parallels Long Depression of 1870s.' Its argument is relatively simple and straightforward. And it is based on five similarities between today and the depression that started in 1873. In pertinent part Lynn says this:
"True, historical parallels are never precise. We won’t replay the Long Depression of 1873 to 1896 exactly, nor will this slump necessarily last as long. It is, however, a far more instructive episode than the Great Depression of the 1930s. And there are five key lessons we should learn from it.
First, depressions can last a very long time, and when their origins are in a debt bubble they should be measured in decades not years. For a century or more, depressions have been relatively short, sharp episodes. They are like having a tooth pulled, rather than a chronic sickness — painful, but over quite quickly. But it doesn’t have to be that way. In the U.K., for example, this is already the longest recession since records began — in the sense that output is still below its 2008 peak. It is more enduring than the depression of the 1930s. That is true of many other countries, as well. If, as seems likely, Europe, and perhaps the U.S., slips back into recession in 2012, it will be clear to everyone we are witnessing something far longer than the conventional economic textbooks allow for.
Second, this depression is structural. The Long Depression of the 19th century had its roots in financial speculation, technological change, and the arrival of a massive new player in the global economy. Our current depression likewise has its roots in three huge crises coming together at the same time. We have a debt bubble that had been building up over three decade and which burst spectacularly in 2008. The dollar is in long-term decline as a reserve currency, and as the anchor for the global monetary system, but there is still not much sign of what will replace it. And in the euro, the biggest single economic bloc has created the most dysfunctional monetary system in human history, threatening financial collapses on an unprecedented scale. Think of it as the world economy’s suffering a heart attack, then a stroke, then getting picked up by an ambulance that crashes on the way to the hospital — it is hardly surprising the patient isn’t in good shape.
Three, it’s uneven. The Long Depression of the 19th century was a sustained period of lower growth compared with what came before and what came afterward. Germany, for example, grew 4.3% annually between 1850 and 1873 and then at 4.1% between 1896 and 1913. But in the Long Depression years, it only managed a growth rate of just over 2% a year. It was similar in other countries. The markets remained volatile, with repeated booms and busts, regularly collapsing back into recession. They did grow occasionally, just as Japan has sometimes grown in what is now its second decade of slump. But the growth is never sustained.
Four, good things are still happening. It isn’t all doom and gloom. In the Long Depression, some countries were largely unscathed. New technologies and industries were being created. The telephone was invented, and the foundations of new industries based on the petrol engine and electricity were put into place. The people who got it right still made huge fortunes, and the workers in the right industries prospered. Overall, however, times were hard. And you had to position yourself carefully.
Five, it won’t be fixed easily. The parallel with the 1930s is dangerous, because it has convinced bankers and policy makers that if you can just pump up demand, everything will be OK. It won’t.
Sure, demand is important — there is no point in letting it collapse. But this won’t be over until all three structural problems get fixed. Debt needs to be paid down to manageable levels, a new reserve currency needs to be created, and the euro needs to be put out of its misery. None of these are simple tasks, and none will be done quickly.
The global economy will eventually get back to normal growth. But the truth is, it is going to be a long, hard haul — and a lot of work needs to be done it get back on track."
So there we have Lynn's reasons for our long term global predicament. A debt bubble which has burst, a dollar which will need to replaced by a new reserve currency, and a Euro awaiting its inevitable demise. What he says can't be easily refuted.
Accompanying all this is a clueless set of U.S. politicians trying more short term measures to stimulate the economy. Of course, this only adds more debt on top of what is already too much debt. These demand oriented Keynesian policies will only aggravate our weakened financial condition and increase pressure on the U.S. dollar over time.
And finally, we cling to a big and growing government sector in the U.S. instead of insisting on moving toward a smaller government coupled with a more productive, competitive and self reliant private sector.
Unfortunately, too many of our fellow citizens seem to like it that way, so we may be in for hard times for a long time. As George Santayana said more than one hundred years ago, "Those who cannot remember the past are condemned to repeat it." Sad but still true.
Let's hope things work out differently this time. I'm betting just that--that things will work out differently--and for the better this time, that is. Count me in on the optimistic side of the argument.
Thanks. Bob.
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