The New Normal

I caught the film “Company Men” on TV over the last week. It was yet another tale of the impact of the Great Recession, as its now called, on society, this time focusing on the mid-level manager types who while well paid and technically wealthy, were living pay check to pay check during the boom and then wiped out financially when their cosy $200,000 a year job went up with the balloon.

Of course this prompts the constant question of when will the recession end? When will things go back to normal. Well I’d argue, we’re in what you could say is the new normal. It was the economic growth prior to the recession that was unusual and the recession has more been a case of the global economy resetting itself to a more stable equilibrium.

The truth is that starting from the Thatcher and Reagan era up till 2007 the world went through an unprecedented level of economic growth that was not normal. It was in fact an unsustainable boom. It was sustained by many factors that just could not be maintained, not least because many of them were entirely self-destructive.

e.g. in both the beginning and end of the boom corporations would downside or shut down factories in order to boost their share price. To draw an analogy, if the owner of the local fruit shop were to respond to a temporary drop in profits by firing staff and closing off half his store, or a farmer responded to a bad harvest by having his prize winning breeding heifers sent off to slaughter, most would argue they’d clearly gone a bit mad and if the bank heard about it they’d be calling in any loans pretty quickly. Yet this is basically what many corporations were doing in the 80’s. Towards the end several of the Wall Street firms were betting against themselves, equivalent to taking out fire insurance on your own firm and then asking the insurance agent if he knows where you can buy some petrol and could he lend you a match.

And this bubble was ultimately the result of the deregulation heavy lassie-faire policies of Thatcher and Reagan. Of course we can’t solely blame Thatcher/Reagan for this crisis. Clinton’s decision to repeal the Glass-steagall Act certainly didn’t help matters, nor New Labour’s failure to properly reign in the city of London. And one can scarcely think of a worse person to have in charge of the US economy at the crucial hour than G. W. Bush.

Also, as I discussed in a prior post, we have to consider the issue of global oil supplies. Oil shocks of the 1970’s were replaced in the 80’s and 90’s with a massive oil glut. Prices fell so low that in the 90’s oil once hit a low of around $10 a barrel. Of course this trend wasn’t sustainable and its very likely that the growth of China simply soaked up so much of the world’s oil and gas to raise the price so high as to finally burst the bubble.

As the saying goes, those who fail to learn the lessons of history are doomed to repeat them. Those who favoured deregulation failed to pause and ask why those regulations were brought in to begin with. As the history of capitalism is littered with examples of short sharp boom and bust cycles with market panics and many of these rules had been developed in the wake of one train wreck or another.

And indeed all the evidence is that the spiv’s in the markets are at it again. In the last month we have news of attempts to rig the London foreign exchange rates. This of course coming on the back of the LIBOR rigging scandal. Notably nobody was actually arrested or jailed for that so is it no surprise that they’re at it again. Also this week comes news of traders conspiring to rig the HIBOR rate in Hong Kong…over 100 times in recent years! The Economist also has an article out about the extent of “crony capitalism” worldwide, demonstrating that in some countries as much as 40% of the economy is essentially corrupt….and unsurprisingly Hong Kong finishes top with Russia second. Again if you let people get away with such high crimes is it any surprise that the fail to chance and keep doing it over and over again.

And we would do well to remember this or else its very possible we’ll be staring into the same abyss again in a few years time, but this time there will be no bailout as the public will not stand for it and no government will be able to afford it.

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