Saturday, April 13, 2013

On Permanent Recession

It has now become a habit: A turn in the stock market, followed by as much excitement as possible on the TV and predictions on the newspapers that finally world economy is turning a corner. This then is followed by the trivial and the ordinary, politicians trying to claim that they are in charge of the future, daily chores submerging the global trends, an odd story of million dollar acquisitions breaking the gloom just a little - and then bad news returns in force, a triple-dip recession, an anaemic job market, another nation tottering on the edge of bankruptcy, a storied company shutting the door. This is followed by more claims from the politicians, that they are in charge of the future and what we need is more of the same, and then another cycle begins.

This seems like events, moving forward, but the truth is that we are getting used to our own stories, that we shall get over with this recession with a bit of time, that it is all our past folly and that of governments long voted out, and sins of a few wayward bankers, oblivious regulators and economists. Indeed, this is the best story we can get, and the only story we know. Our middle class sensibilities are deeply steeped with this illusion of stability and progress, and more of the same is the only thing we have learnt to want.

The only thing our policy-makers know to produce more of the same available is to keep supplying more money, cheaply. This has been going on ever since those fateful days our collective folly became apparent: The interest rates have been kept low by coordinated action of the money-makers, and markets were flooded with more money, quantitative easing being a common place euphemism. This has not worked (As The Economist reports 'The World of Cheap Money') and the economy has remained on the life support; hence, our cycle of short-lived euphoria and catastrophic downturns continue. 

However, I shall argue that the policies we have tried to adopt to get out of recession are making the recession more permanent. This hope of distant cure and the over-reliance on economic theories of the last century has allowed us to avoid looking at current social and economic realities. All the British governments, Labour and now Tory, have done when confronted with recession is to go out of their way to protect the politically powerful asset-owning classes, completely disregarding the market adjustments that are well under way. In summary, despite the persistence of boom-bust cycle in Britain, because its economy is so utterly housing dependent, no lessons have been learnt and the current Chancellor is again hoping to ride out of recession on the housing broom!

Indeed, style triumphs substance and words are spun to obscure evidence in mass media democracies, and so far, baby-faced politicians have managed to ascribe all the blames to their less attractive-looking predecessors; they have also managed to sell their own agenda on the hope for recovery into a distant future, and opted, instead of dealing with hard issues, to pussy-foot around with monetary manipulations. However, all the talk has hardly encouraged business creation, demand for investment goods or created social mobility that underpins the creation of a meritocratic economy.

The only way to get out - and everyone seems to know this already - is to allow a financial equivalent of a bloodbath, a period of massive adjustments where asset values are allowed to fall back at real levels. There are a number of problems with this, indeed: If they do, a number of banks will go bankrupt, because they have so many mortgages on their books: However, there is no real choice to get out of this mess without allowing asset prices to adjust to real levels. It will mean misery for everyone, in the short run and this is why no democratically elected leader is willing to do this. But, slowly, we are coming to a point where such a wind-down will be unleashed upon us, and it is somewhat better that it is managed through a policy initiative than a massive, unintended contraction.

Seen in a way, this is a Corn Law moment of the contemporary capitalism. Corn Law was the last grasp of the landowning aristocracy, which wanted to prohibit import of corn to keep prices high for their corn, and indeed rents high for their land; eventually they had to give in to the Makers, people who made industrial revolution possible, who wanted food prices to drop, so that wages could drop and industrial production could flourish. We have reached another such point, where the interests of the asset-owning classes, the ones the governments keep protecting (The British Chancellor, George Osborne, even calls them 'Wealth Creators' and successfully argued for reducing the top rate income tax in their favour), are at direct conflict with those who can create jobs and wealth, the challenger entrepreneurs, and unless the priorities shift from encouragement of asset owning to wealth creation, we shall remain sunk in a perpetual recession.

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