Forms of M-Depression and Beyond

Tsang Shu-ki (11 Feb 2009)

 

Listening to Bill Gross the other day on TV, when he talked about the possibility that the US economic recession might turn into a “mini-depression” which would require trillions instead of billions of US dollars in rescue packages from the Obama Administration, a sudden classification of M-disasters came to my mind:

 

1.        Mini-depression;

2.        Medium-depression;

3.        Maxi-depression.

 

Should Maxi be Mega or G…?

 

Whatever the eventual outcome for the US and the global economies, the belated policy reactions of treasury departments and central banks over the world seem to be summarized, quite succinctly, by the media slogan that “we are all Keynesian again” – a shift away from defunct monetary policies in view of a “liquidity trap” (when zero interest rates don’t work, not even “quantitative easing”) and towards “New Deal” type of fiscal stimuli.

 

That eclectic combination of responses, whilst understandable in averting a financial meltdown (largely of Wall Street making, in recent years at least), is intellectually misconceived.

 

Keynesianism, as distilled into text books and professional literature, is essentially a short run model, having relatively little to do with structural imbalances in an era of globalization dominated by irresponsible “financial innovation” under incompetent regulation. Keynes himself, by the way, was one of the greatest modern economists. He had the good sense of suggesting new international institutions, eventually in the form of the IMF and the World Bank. But brilliant scholars have regularly been betrayed by lesser beings.

 

Let’s go back to the present financial tsunami and the unfolding real shocks. Governments in the developed and developing economies, in their earnest, may be fighting the wrong war, learning too much from the Great Depression of the 1930s and the “lost decade” of Japan.

 

Capitalist long waves have had common underlying causes, but history would never repeat exactly for the simple fact that humans do learn, up to a limit (influenced mainly by demographic and cultural factors).

 

The present world-wide crisis has shown unique structural features, beyond Keynes the genius.

 

As an analogy, we (meaning the world) are having a sudden (well, not quite) collective heart attack. The reflex response on the part of any concerned doctor(s) is to save the heart by all means (including “helicopter money”, “nationalization of banks” etc. in terms of economics). However, if the surgery and the drugs seriously weaken the human limps months or years later, what kind of a “person” will the recovering patient become?

 

Let me put it in another way: Should a doctor spare more time in the diagnosis of a patient supposedly suffering from heart attack, before administering the “life-saving” surgery and drugs?

 

I know. Finance Ministers and Central Bankers are not doctors. And most of them do not have long cycles.

                                                                                                                    

Pessimists like me, who forecast the possible fiasco all along, unfortunately have to face the unpalatable question: “What now?” (Is that our responsibility – even if we were doctors?) “I told you so” is apparently not convincing enough.

 

The last thing I want to do is to convince people who don’t follow history. My personal addendum is simple. The global economy would not return to a plausible equilibrium until:

 

1.        The dominant superpower, i.e. the US, corrects its lamentable lack of savings, over-consumption, over-investment and hegemonic projection of international power in the “hard” way.

 

2.        The rising contending powers, including China and the other three members of BRIC, plus Japan and South Korea, find ways to live with a bruised US.

 

3.        The international financial architecture is revamped to root out malpractices and to enforce effective regulation.

 

4.        The eternal identity (which can’t be wrong accounting-wise) “net saving ≡ fiscal deficit + external surplus” is reshuffled among surplus and deficit nations in a meaningful sense so as to redress pathetic global symbioses (despite the debate about savings glut versus shortfall, i.e. who’s responsible for generating the imbalance on the left hand side of the identity in the first place).

 

In short, what we are confronted with is not any normal cyclical problem. Short-term (packaged) Keynesianism via fiscal stimuli will probably prolong the agony and the inevitable painful adjustments, if not augmented by genuine GLOBAL STRUCTURAL reforms.

 

But global structural reforms are not easy to come by, in the absence of …….

 

Unlike the aftermath in the post-1930s era, doubts hang around about an effective international leadership to manage the present economic earthquake.

 

Is Obama another Roosevelt? Where is a new Keynes (who has the chance to present a developmental perspective)? And what are the ways to tackle worldwide structural problems, in the light of the coming fight for resources and the clash of civilizations, further down the path of the 21st century?

 

I don’t even want to go into what I think (perhaps wrongly) was the actual New Deal “solution” to the Great Depression of the 1930s. What happened in 1935-45?