The Ongoing Depression
Sunday, March 3, 2019 12:17
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“The Ongoing Depression”
By Jim Rickards
“The United States is living through a new depression that began in 2007. It’s been part of a larger global depression, the first since the 1930s. This New Depression will continue indefinitely unless policy changes are made in the years ahead. People are shocked when I say that the U.S. has been in a depression for over a decade. We’ve been growing for the past nine years. We might not be growing like gangbusters, but we’re still growing. How can you call it a depression?
In the first place, mainstream economists and TV talking heads never refer to a depression. Economists don’t like the word depression because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist. This view is one of the many failings of modern economics.
The starting place for understanding depression is to get the definition right. You probably think of depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment. Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline. But that is not the definition of depression.
The best definition ever offered came from John Maynard Keynes in his 1936 classic, “The General Theory of Employment, Interest and Money”. Keynes said a depression is, “a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.” Keynes did not refer to declining GDP; he talked about “subnormal” activity. In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt. That is exactly what the U.S. has been experiencing.
Historically, the long-term growth trend for U.S. GDP is about 3%. Higher growth is possible for short periods of time. It could be caused by new technology that improves worker productivity. Or, it could be due to new entrants into the workforce. From 1994 to 2000, the heart of the Clinton boom, growth in the U.S. economy averaged over 4% per year. For a three-year stretch from 1983 to 1985 during the heart of the Reagan boom, growth in the U.S. economy even averaged over 5.5% per year. These two periods were unusually strong, but they show what the U.S. economy can do with the right policies.
By contrast, real growth in the U.S. over the past decade has averaged 2.23% per year. Even stimulated by the Trump tax cuts, 2018 growth still came in below 3%. It was close, but it couldn’t quite get there. And there’s little reason to think 2019 will either. If the U.S. economy held to its traditional growth rate for the past decade, the country would be about $5 trillion richer than it is. Having an extra $5 trillion could help address a lot of problems.
That is the meaning of depression. It is not negative growth, but it is below-trend growth. The past ten years of sub-3% growth when the historical growth rate is 3%, is a depression exactly as Keynes defined it.
Pundits point to 4.2% GDP growth in the second quarter of 2018 and 3.5% growth in the third as proof that the economy is expanding robustly. Talk of a new depression seems like nonsense at best and confusing at worst. But a lot of that Q2 growth was consumption, fixed investment (mostly commercial) and higher exports (getting ahead of tariffs). U.S. consumers also went on a binge, but much of that was funded with credit cards where losses are already skyrocketing and a return to higher savings and less consumption has resulted. In other words, Q2 growth was temporary and artificially bunched in a single quarter. None of which adds anything to GDP in the long-run. That doesn’t point to a sustained economic recovery.
Other observers point to declining unemployment and rising stock prices as evidence that we are not in a depression. They miss the fact that unemployment can fall and stocks can go up during a depression. The Great Depression lasted from 1929 to 1940. It consisted of two technical recessions from 1929–1932 and again from 1937–1938.
The periods 1933–1936 and 1939–1940 were technically economic expansions. Unemployment fell and stock prices rose. But the depression continued because the U.S. did not return to its potential growth rate until 1941. Stock and real estate prices did not fully recover their 1929 highs until 1954, a quarter century after the depression started.
Growth today isn’t strong because the problem in the economy is not monetary, it is structural. The point is that GDP growth; rising stock prices and falling unemployment can all occur during depressions, as they do today. What makes it a depression is ongoing below trend growth that never gets back to its potential. That is exactly what the U.S. economy has been experiencing. Whether or not most people realize it, we’ve been in a depression as Keynes defined it.
But year after year forecasters at the Federal Reserve, the International Monetary Fund and on Wall Street crank out forecasts of robust growth. And year after year they are disappointed. The recovery never seems to get traction. First there are some signs of growth, then the economy quickly slips back into low-growth or no-growth mode.
The reason is simple. Typically, a recovery is driven by the Federal Reserve expanding credit and rising wages. When inflation gets too high or labor markets get too tight, the Fed raises rates. That results in tightening credit and increasing unemployment. This normal expansion-contraction dynamic has happened repeatedly since World War II. It’s usually engineered by the Federal Reserve in order to avoid inflation during expansions and alleviate unemployment during contractions. The result is a predictable wave of expansion and contraction driven by monetary conditions. Investors and the Fed have been expecting another strong expansion since 2009, but it’s never really materialized.
Growth today isn’t strong because the problem in the economy is not monetary, it is structural. That’s the real difference between a recession and a depression. Recessions are cyclical and monetary in nature. Depressions are persistent and structural in nature. Structural problems cannot be solved with cyclical solutions. This is why the Fed has not ended the depression. The Fed has no power to make structural changes.
What do I mean by structural changes? Shifts in fiscal and regulatory policies. The list is long but would include things like lower taxes, health care, expanded oil and gas production, fewer government regulations and an improved business climate in areas such as labor laws, litigation reform and the environment.
Trump has lowered taxes and cut regulations. But deficits are also growing at alarming rates, and we’re looking at trillion dollar deficits for the next decade. During normal expansions, you’re supposed to pay down debt and lower deficits. We’ve been doing the opposite.
Power to make structural changes lies with the Congress and the White House. But with Democrats threatening impeachment and Democratic politicians promising even greater spending and regulation, don’t expect anything to get done. Barring substantial changes, this new depression will continue and the Fed is powerless to change that.”
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Freely download “The General Theory of Employment, Interest and Money”,
by John Maynard Keynes, here:
Source: http://coyoteprime-runningcauseicantfly.blogspot.com/2019/03/the-ongoing-depression.html
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