The depression ahead

It is by now clear, that the industrialized countries of Europe and the USA have entered a new recession at some point in the second quarter of 2011, or maybe even earlier. Japan did so anyway, after suffering from the worst tsunami in recorded Japanese history. (*)

The strong reaction of the stock markets to this earthquake already suggested some frayed nerves among the traders, which is often an indication of economic troubles – and the slow, two week long crash this August is not proof of a recession, but certainly more reliable than the official figures of the governments.

Yes, the 11 month delay in the announcement of the 2007-2009 recession after its onset is not to be taken lightly. It is foolproof evidence that economic statistics are used to try and sooth the population – just as the Soviet Union, Eastern Germany or the rest of the eastern bloc did before their economic collapse.

There is, however, no reason for doom and gloom because of the occasional recession. The recurring recessions in the 1950ies, 60ies and 70ies didn’t stop the extraordinary growth of the US economy or the European economies during that time – that was much larger than that during the “great moderation” that unsurprisingly also brought mostly mediocre growth to industrialized countries.

The pessimism has its root in the policy decisions being made to address the current crisis. And actually, they don’t address the crisis or follow some very strange contortions that result from fundamental misconceptions. Just today German politicians stressed the importance of European countries balancing budgets before any intervention of the core country economies helping the “weak” countries of the European periphery.

But first of all, the economies of the periphery are already in a severe recession because of the recent austerity measures and more of those will just lead to a complete collapse. Japan had this experience of economic collapse 1997 that resulted in the national debt rising by a further 60% of the (now diminished) GDP. And even that was just 60 years after the USA went through the same fallacy of balancing its budget in 1937, before properly reestablishing and balancing the economy – prompting a return of the recession that only ended four years prior in 1933.

So, you may ask, why should countries like Germany, the Netherlands or France worry about the economic collapse in the periphery countries?  Well, the European economy is just that – a European economy. This is a great boon for the continent, but it also means that all countries are now interconnected. Even brushing aside, for the moment, the troubles of the common currency, the core countries need a functioning periphery in order to keep their own economies employed. Who else is going to buy their exports? The USA and Japan both have troubles of their own and neither the BRIC countries nor the African economies (that have grown at an unprecedented pace over the last decade) have yet grown large enough economies to replace the developed and industrialized countries of Europe.

This has shown in the massive collapse of the German economy in 2008 – even though that went mostly unreported by the government and media – who were instead busy pointing out the economic growth that followed the collapse … which has now ended before reaching the pre-crisis levels of early 2008. The core economies – most of all Germany – refuse all responsibility for the rest of the European economy and this is scary. It basically puts everything into doubt that the European project stood for.

The current set of policies are a recipe for certain disaster. Even avoiding a lost decade would constitute a miracle, because that decade started over 3 years ago and the outlook is deteriorating by the week. Of course, the economic depression will end at some point. Eventually, the current governments will be discredited, but one wonders what will happen then. In the best of all worlds, they will reform economic policies to somewhat less braindead alternatives (details in some other blog entry). But history shows that this is the ideal breeding ground for radical and violent political movements.

The Depression ahead will mark a turning point in world history – but what the contents of that history book have yet to be written.

(*) Much worse than those of 1896 or 1933 – which prompted Japan to build its (unfortunately inadequate) system of seawalls. Probably not as bad as the Kanto Earthquake of 1923 but much worse than the Kobe Earthquake of 1995. (I leave it to the readers to construct conspiracy theories correlating tectonic events in Japan to previously existing economic troubles.😉 )

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