How do economic downturns end?
My theory (having been through a few of them) is that they end when people like you and me get bored of gluing our butts to the sofa to watch reruns of The Munsters or The Simpsons, as the economy does nothing, and decide that life is more fun when it involves making money, taking risks, travelling, eating out and getting pleasantly tipsy on Greek islands.
I'm convinced that's how the U.S. recession of the early 1990s ended. I was living in Manhattan at the time and the downturn just sort of vanished, as the desire to play it safe was overwhelmed by the sudden release of pent-up human energy. Of course, it was not that simple, because growth spurts typically come with trigger events.
Back then, it was the combined forces of the tech, real estate and financial services booms. A decade later, the endless flood of cheap money propelled the real estate boom to bubble status; houses themselves became tools of financial speculation. It all ended in tears in 2008, but – damn – the two-decade-long ride sure was fun.
Which bring us to the 2012, the year of the Big Stall. The 17-country euro zone, which includes three Group of Seven countries, is in recession.
On Thursday, the European Central Bank downgraded its forecast for the euro zone yet again, predicting that the economy will shrink between 0.2 per cent and 0.6 per cent this year. Britain is in recession. Growth is slowing in the BRICs (Brazil, Russia, India, China). If the anticipated soft landing in China turns into a hard landing, all bets are off for a sustained global recovery.
The United States' economy is expanding, but so slowly it's better described as the zombie shuffle than growth. On Friday, fresh, and disappointing, data showed that the American jobless rate, at 8.1 per cent, has remained at more than 8 per cent for the 43rd-month running. Count on quantitative easing part three. Unemployment in virtually every industrialized country is rising – it is 25 per cent in Spain – as corporations equate hiring with taking on unnecessary risk, even though many are generating obscene profits as they cut costs with alacrity.
So what force or trigger event will end the Big Stall?
None comes readily to mind. For this reason, the combination of recession in some parts of the world, stagnation in others and falling growth rates elsewhere is unlikely to end quickly, unlike so many of the previous downturns. Paul Krugman, the Nobel-winning economist, used his book End This Depression Now! to argue that we should "accept the fact that we're in a depression."
While the term may be a bit strong, especially to anyone who lived through the 1930s, the planet could face a protracted period of low growth, and that's bad news for job creation and debt reduction. It means debt to gross domestic product ratios will keep rising in spite of the best efforts of finance ministers everywhere to balance budgets, all the better to send the sovereign bond warriors packing.
In truth, wealthy countries have been slowing down since about 1970, according to John Bellamy Foster and Robert W. McChesney, the authors of a data-packed article called "The Endless Crisis" in the May edition of Monthly Review.
Industrial production in Japan rose by almost 17 per cent between 1960 and 1970. Between 1990 and 2010, it rose by a mere 0.04 per cent.
The United States in the 1950s and 1960s experienced extraordinary growth because of cheap credit and energy, Cold War military spending, suburbanization and the advent of the car culture and vast interstate highway system, among other economic jolts, Mr. Foster and Mr. McChesney wrote. In Europe, the reconstruction of countries ripped apart by war fuelled a similar boom.
The inflationary effects of the Vietnam War and the Arab oil embargo ended the long party in the early 1970s. After that came periods of stagnation, stagflation and recession, but, equally, periods of amazing growth brought on by the advent of the bubble economy – housing, technology, commodities and financial services, where Americans and Britons and others replaced making things with speculating on things. The downturn triggered by the tech bust of 2000 was saved by the housing bubble, itself the product of endless cheap money (my Toronto real estate agent told me that, at one point, he owned 20 houses in the early part of that decade, many financed by credit-card lines).
The world has changed a lot since those giddy days. The nasty austerity programs in Europe have created a negative feedback loop, with austerity pushing economies deeper into recession, in turn forcing greater austerity and ever deeper recessions, like a grand, transnational suicide pact. So forget about Europe saving the day any time soon.
Banks everywhere are overstretched; in Europe, many are effectively insolvent and more than a few – the Spanish ones, for instance – need bailouts. Hurting banks do not grease the economy with easy credit to businesses, another reason why otherwise viable companies are not hiring.
The financial services industry in Britain and North American, whose share of domestic profits had reached absurd levels before the 2008 crunch, are busy shrinking. The combo of private and public sector deleveraging is the death knell for job creation, and American austerity is just about to get under way as the national and state debt loads reach scary proportions. The housing boom is over.
Meanwhile, some companies have become so big that they can keep prices high and stifle competition, hurting the entrepreneurial flare that is needed to turn small companies into medium-sized ones, creating jobs along the way.
Lehman Brothers collapsed four years ago. The recession, debt and banking crises have endured since then. Everyone is bored by the downturn as it enters its fifth year. But absent a trigger growth event – the launch of Apple's iPhone 5 doesn't quite qualify – the boredom will endure. Get used to the sofa. Stalled economies may be the new normal.
Eric Reguly