Monday, May 11, 2009

A Job That Doesn’t Need Doing - The Structural Crisis of 2009

A structural economic crisis is very different from normal economic crises. With an astonishingly accurate history, they come around just about once every 40 years. When a country slips into a structural crisis, it means that there is really nothing that can be done about it, except to plan for a new future when the crisis is finally over.

Put more simply, a structural crisis means that the way in which a country has previously built its prosperity has come to an end. This is because the country has become dependent on a certain type of industry that has become obsolete, unable to compete or can no longer grow.

The following is a timeline of structural economic crises in America over the last 120 years:

1890 - The Long Depression

For a few decades, the U.S. economy had been growing rapidly as a result of the development of natural resources and huge investments in infrastructure, most notably railroads. This ultimately made the entire economy dependent on the continuation of this rapid growth, because so much money had been invested the driving forces behind it. When the crisis came, mines, railroads, factories and farms closed on a large scale, and unemployment eventually reached close to 20%.

Fast forward 40 years:

1929 - The Great Depression

In my view, the Great Depression was caused by a combination of a tech bubble and a real estate bubble. These bubbles were inflated with the help of too much credit and speculation with borrowed money. The U.S. economy had become dependent on the continuation of these bubbles, and the high value of the stock market, and when that was no longer sustainable, everything came crashing down. The outcomes are well known: unemployment of 25%, bread lines and lost savings.

Fast forward 40 years:

Early 1970s - Oil, Gold and Manufacturing Crisis

Another classic type of structural crisis is when an industry becomes completely unable to compete, seemingly over night. This happened all over the Western world in the early 1970s in the apparel sector. Huge numbers of people used to be employed in this sector prior to this time, but Asian competitors took over the market completely. This was only a part of a series of Asian manufacturing takeovers that continues to this day.

The 1970s crisis was multifaceted, and not as severe in the short term, although it could be argued that it partly set the stage for the next crisis. The 1970s crisis also involved the end of the Bretton-Woods system and the oil embargo.

The most notable long-term outcomes in the U.S., though, was a decline in manufacturing of apparel, steel, ships and many other industrial goods, because American companies were unable to compete with imported goods. This crisis permanently changed the make-up of American employment in general, as manufacturing jobs kept getting lost (in relative terms) even after the crisis had passed.

Fast forward 40 years:

2008 - Subprime/Derivatives/Credit Crisis

Out of the three structural crises I have briefly described, the current crisis is certainly the most similar to the Great Depression. The similarities keep adding up every day, but the most striking similarity is the fundamental causes: a real estate bubble (preceded by a tech bubble), built on too much borrowing and speculation with borrowed money.

Put in other terms, the dependence on Wall Street in particular really unite these two structural crises. Speculation with borrowed money, the government’s vested interest in the continuation of the bubble, ordinary people’s reliance on the bubble itself: the situation today is almost exactly the way it was in the 1930s.

What I'm actually saying by giving the example with the 40-year cycles is that it seems that it takes 40 years for an economy to develop different types of imbalances. These imbalances can take different forms, but all lead to the same thing: a structural crisis.

For a polticial discussion, imbalances that lead to structural crises are very helpful tools in trying to figure out the best way forward for an economy. There are distinct imbalances that can develop both on the left and on the right. Today's crisis is one that developed on the right, and the crisis in the 1970s was a crisis on the left.

Put simply, when an enormous accumulation of capital occurs in the financial sector, or in an oligarchy, a severe imbalance in the economy has developed. That was the case in the 1930s as it is today. This leads to a structural crisis.

Conversely, when the government tries to steer the economy too much in an artificial way, the industry usually becomes uncompetitive. This was the case with the British auto industry in the 1970s and the Swedish shipping industry in the 1980s. This also leads to a strucutural crisis.

What we see in this pattern is another example of a political pendulum swinging back and forth. Judging by this pendulum, the next structural crisis in the U.S. will occur in 2050, and it will be a structural crisis coming from the left.

When an economic system becomes reliant on speculation alone, which is the case now and in the 1930s, I believe that the crisis will be more severe.

Before the Long Depression and the crisis of the 1970s, the U.S. had overextended itself in particular industries, but there was at least something to show for it at the end of the day. There were goods and infrastructure available that people legitimately needed, but a crisis which has Wall Street speculation as its main feature leaves only a black hole.

Financial speculation is a job that doesn’t need doing. It benefits no one in the long run. Speculation inflates bubbles that in the end do a lot more harm than good, particularly to ordinary people who don’t see them coming.

Speculation doesn’t provide a good source of funding for businesses and their new ventures, both venture capitalists and businesses can attest to that. Most importantly, as we have seen now, it can bring down an entire economy if it goes on for long enough.

Whether you are on the left or on the right, financial speculation is your enemy. I believe that the U.S. will fall into a depression either this year or in 2010. History is screaming it from the roof tops.

Moreover, I advise that the winner-takes-all voting system should be destroyed.


Anonymous said...

Are you being overy pessimistic here?

All my friends are currently employed, they all have houses and are able to pay off their mortgages and they don't seem to be experiencing financial problems.

I am the only so far that has been laid off so I don't see a depression on the horizon.

People are still working, going out to restaurants, concerts, etc, etc....

A friend of mine just opened a restaurant as well! I'll see how that goes.

Jacob said...

I'm sorry you were laid off. When you look at what in economics is referred to as the micro perspective, it can lead you to believe different things. I, on the other hand, have friends around the world who have been laid off.

In the case of small businesses, even a small drop in business of say 10% can have severe effects, because it can eliminate an already thin profit margin. Such margins grow much thinner the more credit is used in a society.

It might be easier to consider the real estate market. A drop of 10% in buying activity can eliminate the pressure that is needed for prices to keep moving up. when that pressure eases, the fundamental reasons for investing in real estate across the board (including on Wall Street) disappears.

It is definitely possible that I'm being overly pessimistic, yet in my view, nothing has improved in the economy since the crisis began. When everyone is telling you that things improve, and this is a calculated and openly admitted strategy from the government, it is very hard to not believe in it, because you want to believe in it. It's just human.

Like I said in the post, this is a structural crisis, and there is no way to just mend the economy, it has to change. The American textile factories simply couldn't compete with Asia, and now they're gone. the financial industry is not needed, and it will not survive.

Anonymous said...

I'm not sorry I got laid off because it forced me to come to terms with the reality of this changing global economy.

I was outsourced by technology and that is why I can't figure out how most of the people I know still have jobs. i.e. they are not doctors and they are not plumbers. They are sitting in offices doing paperwork and those jobs, if they're not being outsourced to India are being replaced with better software. i.e. you need fewer people to do the same things.

If I were to take your prediction, I'd say that the real effects of this economy are still 2 years away, but that's just a guess on my part.

The real job losses haven't even begun.

Anonymous said...

George Soros thinks a financial crisis has been averted and the worst is over.;_ylt=AvsbfCVoUNFOZUJiQ1MOmYOyBhIF