They Should Have Called It Another "Great Depression"

The Reason the Great Recession Isn’t Over Is Because It’s Another “Great Depression”

There’s good news and bad news. The good news is that if you own a portfolio heavily weighted in favor of defense stocks, you may even expect gains in 2018. This is especially true for those who boarded that train early on—that is, before Donald Trump was elected president in 2016. But for everyone else, 2018 and the next few years could be characterized by a recession, if not another and more vicious Great Depression. A correct analysis begins with framing the problem in the right language.

The term “Great Depression” should not be used lightly. It was a terrible period of the 20th century. But the recession that began in 2007-2008 was equally troubling. Indeed, in relative terms, it was worse. And it’s not over yet.

The economists and journalists, who described the socio-economic breakdown resulting from the unraveling of the sub-prime mortgage derivatives as the “Great Recession,” were wrong. It was another great depression—or the greatest depression. Much has been said about an economic recovery, and if Wall Street is any indication, it certainly looks that way. But stocks and related indices tell a minuscule part of the story.

The economic collapse and financial crisis 2008 had as much social impact as it did economic. If the economic aspects have seen some improvement, the social ones have not. It was social in the sense that the 2008 financial crisis ejected millions of Americans (and others in the developed West) from the ranks of the middle class while promoting a handful of them to the plutocracy. Few officials have ever acknowledged the reverse wealth-distribution that the 2008 crisis generated.

The Financial Crisis Has Provoked a Societal Psychosis

It’s an event that has disturbed society in a deep psychological way, in the same way, an adult’s unexamined childhood trauma can cause problems for the rest of his/her life. It’s essential for the world—and the United States, in particular—to address the social damage that the financial greed behind the sub-prime crisis has created.

A good starting point might be to start calling what began in 2008 as a second “Great Depression.” This is crucial if we are ever to experience a steady and sustainable economic recovery.

Economists and political leaders should start to look t the global economy as a depressed patient. The realization is that the economy’s inability to function is for the simple reason that the so-called recession is not over. That’s why recoveries are spotty and weak. The traditional era of boom-and-bust economic cycles has ended. It follows that there cannot be a traditional recession or recovery.

A Radical Shift in the Economic Cycles Pattern

Until a few years ago—before globalization (or the period after the end of the Cold War), that is—an economic cycle consisted of a period of growth followed by a shorter period of recession. Governments and central banks would gradually apply some stabilizing policies—from a well-known and used handbook—to automatically revive the economy.

But now, there cannot be a recovery. That’s why the old industrialized world (the U.S, Europe, and Japan) has yet to experience a truly solid one. Salaries are still below their 2008 levels, even if some have gone up from the lows. One reason is that, as economist Michael Hudson points out, from the late 1940s to the present, recovery phases began with a rapid accumulation of debt.

But, debt was so high at the start of the recession that there was no room for more accumulation. In practical terms, ordinary people—especially the working class—if they’re lucky to have retained a steady income, are devoting much of it to paying back the interest on their debt. If they’re lucky, they’re also paying back the principal.

Putting Out the FIRE

Economist Irving Fisher called the phenomenon many are enduring today as “debt deflation.” The essence is that the people must repay such high interest to the banks that they have no money or resources left to buy more goods. Nor can they borrow further, because bank credit is tight. (Source: “Debt Deflation — the Economic Concept That Proves Market Optimists Wrong,” Truthdig, April 5, 2016.)

Since the early 1990s, despite the tech revolution—or because of it—the economies in the Organisation for Economic Co-operation and Development (OECD) have been dominated by FIRE; not the kind that wrecks homes, but Finance, Insurance, and Real Estate (FIRE).

This means that debtors have fueled the economy through the payment of interests and rents. This is all money that the vampire-like FIRE sector has sucked out of the real productive economy’s balance sheet. Simply put, if money is going to pay for interest and borrowing, then nobody has any left to invest or buy goods and services.

Trump’s tax cuts have failed miserably in boosting spending. He gave all the advantages to the rich—that is, to the few who did not suffer and lose in the recession. The evidence is clear: consumer spending has dropped for four consecutive months. (Source: “U.S. retail sales fall,” Castanet, March 14, 2018.)

How is the global economy supposed to recover if even massive corporate tax cuts fail to stimulate growth? There are no major new investments, except for a few spotty ones here and there (like the new Fiat Chrysler Automobiles NV (NYSE: FCAU) plant in Detroit, if Trump’s tariffs don’t kill that plan). Accordingly, there’s no large-scale fresh employment and salaries are stagnant. Getting rich debt is a false model of growth. It is a distorted cycle that began in 1945.

Not Even Zero Interest Rates Have Helped

Still, the measure of the depth of the past recession comes from the fact that even near-zero interest rates—the so-called quantitative easing—in the U.S. as much as in Europe have helped. To resume spending, many consumers must resort to debt, but even at the super-low rates, they can’t afford to borrow any longer.

The Federal Reserve’s decision to start lifting interest rates has only exacerbated this problem. The result is that the entire boom-bust economic model is itself bankrupt, but nobody knows of the existence of an alternative.

10 years have passed since the financial crisis, starting from the collapse of Lehman Brothers Holdings Inc. But, nobody has produced a comprehensive explanation for how to emerge from it. The crisis has been systemic and global. It has marked the end of traditional economic cycles. And waiting for a new recovery has become like the Samuel Beckett play, Waiting for Godot (spoiler: two protagonists wait for Godot, who never arrives).

Rather, the global economy has suffered not a common cold, but cancer. It’s a vicious circle, if you will, and nobody knows how to escape from this orbit. The effort to use cheap debt—or quantitative easing—has failed. It’s too traditional a solution for a problem that is not typical.

The biggest risk now is optimism; the idea that the recession—or depression—is over. This is the idea behind the Federal Reserve’s plans to raise interest rates. The European Central Bank could soon follow. But the economy on both sides of the Atlantic Ocean is too weak to sustain the higher rates, perpetuating the vicious merry-go-round from which we can’t seem to get off.

True economic redistribution should be the goal. Trump’s tax cut idea was on the right track. But he adopted the long-disproved notion of supply-side economics, better known as trickle-down economics. This is the idea, at its heart, that if the rich are allowed to prosper with fewer encumbrances like taxes, wealth will flow (or trickle down) to the middle and lower classes.

President Reagan tried that in the 1980s and it didn’t work out all that well. The tax cuts will be, rather, an incentive for corporations to engage in stock buybacks to sustain their now ridiculously high valuations. Salaries and employment numbers have not seen any meaningful improvement, while Trump’s tariff games threaten to disrupt the economy further.