And so, yesterday, the northern hemisphere had its shortest day of the year. In Baltimore, the sun never rose and never set. It was gray all day. Then it was night again.
And so the days dwindle down to a precious few. In astronomical terms, the year is already over. We have passed the winter solstice. From here on out the days grow longer. In terms of the Gregorian Calendar, we still have a few more days to go in 2011. Then, we face a new year. New challenges. New crises. And new opportunities. Will 2012 be the year the human race goes into a downturn…a slump…a correction?
Time moves on. So do opinions.
Investors were all hot to put their money on stocks on Tuesday. They thought the euro debt crisis had been solved. And housing was looking up in the US.
But yesterday, there was no follow-through. It was as if they had forgotten what they were so excited about.
That’s the way it has been all year. One day, investors are sure recovery is right around the corner. Then, they turn the corner and there’s nothing there.
2011 began with most people expecting a recovery. Now, they know; there’s something else going on. Something more complicated…something different from the typical recession/recovery pattern they’ve been used to.
If they looked more closely, they would notice that each of the recoveries since the ’80s has been a bit weaker than the one that preceded it. The feds still fight downturns in the same way – with counter-cyclical fiscal and monetary policy. Each time output goes down, the Fed reduces interest rates. This cuts the price of credit, which usually gets people going again – with new investments and new hiring.
But credit is not so different from everything else in the world of economics. The law of diminishing marginal utility applies. The first dollar you borrow pays off. You put it to work building new, more efficient and more productive businesses. The investment pays off. Later borrowings are less effective. Finally, they don’t work at all.
Part of the explanation is merely that the borrowers shift from borrowing for very productive purposes to borrowing for less productive purposes…to borrowing not to produce at all. There’s no payback when you borrow to consume. Zero.
Finally, the recession of 2001 was met with a muscular Fed response – with much lower interest rates and a federal budget far in the red. But the recovery was the weakest ever. It was a “jobless” recovery, with an unusually slow rehiring pattern.
Now, 10 years later…we have something new – a jobless non- recovery! People are beginning to wonder. What is really going on?
Even Martin Wolf, chief intellectual at The Financial Times is beginning to ask questions. “The future is not what it used to be,” he writes.
Here at Markets and Money we have known for a long time that the Great Correction is no ordinary recession. We didn’t know exactly what it was correcting, but we had a list of possibilities.
Is it correcting the 60-year boom in credit that began after WWII? Seems like it is… Credit, in the private sector, has been going down since 2008.
Is it correcting the bull market in stocks that began in August 1982? So far, not much sign of it…but we think so. People are bound to realize, sooner or later, that business profits cannot expand when credit is contracting.
Is it correcting the power of the US empire? Yes…perhaps…but that’s a long story for another time…
Is it correcting the paper-currency, faith-based, centrally-planned monetary system put in place by Richard Nixon in 1971? Not yet. Instead, US debt – denominated in those paper dollars – gets more respect than ever. But we have a feeling that it will be corrected before this crisis complex is over.
On Monday, word got out that the European Central Bank has lined up with the Fed and other central banks to fight the debt crisis by…yes…creating more debt. And more paper currency. It will lend another half-trillion euros – or so – to the banks. The banks are supposed to make more new loans and buy up more old ones. Specifically, they’re expected to take money from the central banks and use it to buy government debt, thus keeping the chickens from coming home to roost as long as possible.
In the meantime, economic growth, it is hoped, will finally get into action. Growth, they think, is the “mean” to which the developed economies will revert…which will raise GDP and tax receipts, reducing deficits and debts.
But what if growth itself were being corrected?
What if the entire period from the invention of the steam engine to the invention of the internet were not the normal thing, but the abnormal thing? What if the “lost decade” we have just gone through is actually the mean…the usual…the normal thing? And what if – after nearly 3 centuries – we have just now reverted to it?
Until about two weeks ago, we thought human beings had only existed for 100,000 years. Now, archeologists are guessing that we’ve been around as a species for twice as long.
You know what that means? It means that our mean rate of growth – already negligible – is actually only about half what we thought it was. In other words, it took not 99,700 years for humans to invent the steam engine, but 199,700. And now, what if we are not going on to something new, but back to something old? What if the New Age is really more like the Old Age…where growth and progress were unknown.
Let’s see, the typical person in 1750 lived better than the typical person in say 100,000 BC. The person in 100,000 BC lived in a cave or maybe a wigwam. The typical person in 1750 lived in a hovel. There were some great houses too, of course. By the 18th century, humans had been building with arches and columns…and domes…dressed stone with elaborate decoration…for thousands of years. But most people had no access to those monuments. They lived in whatever they could put together – usually of wood or mud.
They lived on what they could grow…with their own hands, or with the help of domesticated draft animals. They hunted wild animals…or got their calories from their own herds and flocks.
The person from 100,000 BC was a hunter-gatherer. But his life was not all bad. At least he got plenty of fresh air and didn’t get caught in traffic jambs or have to watch television.
But the progress between 200,000 BC, when mankind is now thought to have emerged…to 1765, when Watt produced his first engine…was extremely slow. In any given year, it was nearly negligible…imperceptible. Over thousands of years there was little progress of any sort, which was reflected in static human populations with static levels of well-being.
Then, after 1765, progress took off like a rocket. Over the next 200 years, the lives of people in the developed countries, and the human population, generally, changed completely.
It took 199,700 years for the human population to go from zero to 125 million. But over the next 250 years it added about 6 billion people. Every five years, approximately, it added the equivalent of the entire world’s population in 1750. “Progress” made it possible. People had much more to eat. Better sanitation. Better transportation (which eliminated famines, by making it possible to ship large quantities of food into areas where crops had failed). The last major famine in Western Europe occurred in the 18th century when crops failed. After that, the famines in the developed world at least have been intentional – caused largely by government policies.
Progress abolished hunger. It permitted huge increases in population. And it brought rising real wages and rising standards of living.
By the late 20th century, people took progress and GDP growth for granted. Governments went into debt, depending on future growth to pull them out. So did corporations and households. Everyone counted on growth. Spending and tax policies were based on encouraging growth. The enormous growth in government itself was made possible by economic growth. After all, as we’ve seen in our Theory of Government, beyond the essentials, government is either parasitic or superfluous. The richer the host economy, the more government you get.
Today, there is hardly a stock, bond, municipal plan, government budget, student loan, retirement program, housing development, business plan, political campaign, health care program or insurance company that doesn’t rely on growth. Everybody expects growth to resume…after we have put this crisis behind us.
Growth is normal, they believe.
But what if it isn’t normal? What if it was a once-in-a-centi- millenium event, made possible by cheap energy?
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