This Time Really Is Different — Part II

This is a follow-up to This Time Really Is Different, which for reasons I don't quite understand is among the most-read DOTE posts since the beginning of time (January 16, 2010). In that first post I criticized the standard economic view of our current problems, which now includes the Carmen Reinhart/Ken Rogoff story. That narrative says our economy is in the doldrums because we had a financial crisis, and it always takes many years to recover from such a crisis. We can thus expect unemployment to remain abnormally high for some time to come. But in the end, the economy will come roaring back on that glorious (but undetermined) day in the future when we've worked through all the debt & credit issues.

This reassuring story ignores all the historical factors underlying the inevitable breakdown of debt-based economic growth in the United States. I listed some of those factors in This Time Really Is Different, and touched on the issue earlier this week in The Breaking Point — Dating The Empire's Decline. Also see Manufacturing — A Story Of America's Decline, Ronald Reagan Would Be Proud, Keynesian Delusions, The College Degree Scam, and Dude, Where's My Recovery? This is only a small sample of my work on these issues.

The Daily Ticker's Aaron Task and Henry Blodget sat down with Liz Ann Sonders to discuss how the American economy is faring in Economy in “Soft Patch” But New Recession “Unlikely,” Schwab’s Sonders Says. Sonders' analysis provides us with a perfect example of the standard story. I have transcribed some quotes from the interview (video below) accompanied by some remarks of my own.

I think [the current economy reflects] a fairly natural mid-cycle slowdown that has some of the same reasons behind it as last summer, but clearly there are some other factors at play. [There's] a global slowdown, but I think another full-blown recession is fairly unlikely. [So what are we headed for?] I think we're in a soft patch ... the aftermath of the tsunami in Japan ... I think the spike we had seen in energy prices from November to April had a very big impact, certainly on the consumption side of the economy, but also on hiring ... and then you had unbelievably epic weather, not only in the United States but elsewhere too... but those are all the temporary factors ...

Temporary factors? We can simply dismiss short-term, random factors like the disaster in Japan. Those lame excuses are always with us. However, what about that spike in energy prices and the unbelievably epic weather? Although I have voiced my objections to the standard "financial crisis" view in strictly economic terms, there are some other small problems we must come to grips with going forward. The first is anthropogenic climate change and the second is peak oil. Neither of these problems is going to magically disappear so as to allow the global (and American economy) to grow and grow in the future according to variations in the business cycle as measured by GDP.

This is certainly not the end of unbelievably epic weather, as I discussed most recently in Meeting The "Challenges" Of The 21st Century, and earlier in Floods Droughts And Heat Waves. In fact, we're experiencing some epic weather right now—the searing heat wave that still engulfs most of the United States. We can thus expect greater volatility and large spikes in food prices. And this is certainly not the end of spikes in the oil price, as I recently discussed in Brace Yourself For The Next Oil Price Shock. Sonders continues—

Normally you have a multi-year expansion that typically lasts at least three years, and we only went from recovery to expansion ... you're in recovery until GDP hits its prior high. We're only two quarters into expansion here, and those [episodes] tend to last at least three years, so I certainly would hope that we could get a couple 'nother years of an upward trajectory in the economy...

I'm not looking for a booming second half [of this year] by any means, but something above the sub-2 percent that is likely to have characterized the first half of the year. I think we could try to find our way back up toward three percent, which is not a great growth environment...

[Will we ever see 5-7% growth?] Probably not in this cycle, because you're right, there's typically a very deep relationship between the depth of the downturn and the pop you get in recovery, but secular issues plague the environment right now ... [there] is going to be a long process of de-leveraging. The private sector started it in 2008, hopefully the public sector has started it now ... the corporate sector already did their de-leveraging in the last cycle, but that is probably going to keep a semi-permanent lid on growth until we get both private sector and public sector debt levels down to a level where it no longer crimps the ability of the economy to grow, because that de-leveraging, whether its the work of Reinhart and Rogoff in This Time Is Different shows that when you have that much excess debt that you're trying to work off, it crowds out the ability of the private sector to grow robustly...

I transcribed Sonders' remarks here because they so perfectly capture the standard story about what the future looks like. Growth will be tepid during the current "business cycle" as the de-leveraging process continues. Once all these debt problems get resolved at some unknown time in the future, the implication is that robust private sector growth will return with a vengeance. It's just a matter of waiting it out.

Read my original post This Time Is Really Different to see what Sonders' analysis leaves out. She refers to "secular issues" that "plague the environment right now." But what is required is a profound understanding the historical secular trends that plague the environment—political dysfunction and corruption, financialization of the economy, the destruction of the middle class, grotesque wealth & income inequality, and so on. If those historical trends continue, and there's no reason to believe they won't, the United States will not experience robust private-sector growth ever again. And remember, the New Austerity is coming, one way or the other, whether you like it or not.

You can take my conclusion about future growth to the bank—if you trust the bank, that is

Here's the video.

Comments

[Don Bowen]

In one of your discussions of climate change you sad something like "Unless you know about xxxxxxxx, don't talk to me about climate change." I would like to find that post and read up on xxxxxxxx.