The Millennium Depression?

A Listener Sequence

This note prepared in the first week of October 2002. Since then I have published the following columns on the state of the world economy:
The Bubble Bursts: A “Millennium Depression”? (2 November 2002)
Deflating News: Just How Sick is the World Economy? (28 June 2003)
Recovery and Deficit: Where is the US Economy Going? (February 2004)

Keywords: Macroeconomics & Money;

Towards the end of the 1990s I became increasingly concerned that the US boom was not only unsustainable, but the reversal would lead to a severe recession or even a depression. In the early 2000, I wrote in a column Self -interest Rates (27 May 2000) which said
“Any monetary authority in an economy which has its share values so dangerously out of line with reality as in the US, cannot be given a top grade. History will be less generous with Greenspan’s reputation, after the millennium depression.”
With hindsight it reads as a bon mot, but it was almost certainly a careful – if gloomy – judgement following a trip overseas. The following is a commentary on the Listener columns which addressed the world economy since then. It was written in preparation for my planned column of 2 November 2002, probably entitled Will There Be Another World Depression?.

It may be useful to provide a bit of background about the columns. They are usually planned at least four weeks before the ‘publication’ date, and filed about three weeks before. But since The Listener is available almost a week before the publication date or only two weeks after filing. (This time cycle is largely my choice. In principle I could file almost a week later, and sometimes I arrange a late filing.) I try not to be too obsessive, so that while over time a series of columns develops around a theme, it is unusual for three columns in a row to be on the same theme. So even if I am very worried about some economic problem, I try not to assault the reader with repetition, and will hang on until I have a new angle on a topic. Moreover, my analysis develops over time. One of the reasons I am doing this review is to trace its evolution in the case of ‘the millennium depression’. [Added later. It was in fact published as The Bubble Bursts: A “Millennium Depression”? on 2 November 2002.

Note this is not all the macroeconomic columns over the 30 month period. Those focused almost solely on New Zealand are omitted. (Use a search with ‘Macroeconomics & Money’ to find them.)

Actually although the May 27 column is the first in which I mention the ‘millennium depression’, I had set some of the key notions up a fortnight earlier with Delayed Impact (13 May 2000) which describes the underlying mechanisms of a financial boom. I don’t know whether it worked. I worry that most of my readers find even this simple arithmetic a bit of a struggle. It is not they cant do it, but the mixing of calculations in text is always problematic. On the other hand I continually seek simple illustrations to set out the comple analytical models which underpin so many of my columns.

Five months after Self -interest Rates I wrote Does the IMF Work? (28 October 2000) which is still hinting about the possibility of a serious recession. The following column Private (Debt) Worries (11 November 2000) reflects on the possibility of an external debt crisis for New Zealand. (It will be a private debt crisis – the government balance sheet is currently very strong by historical and international standards).

However in March 2001 my fears ‘out’. Bursting Out (31 March) discusses the
“vigorous debate about the current US economy downturn. In the jargon the question is whether it will be a V, U or L – the second half of each letter indicating a quick rebound a slow rebound, or a drawn out depression. It is noticeable that informed opinion is moving towards the more pessimistic end of the possibilities, although most commentators currently reckon on the U rather than the L.”

Perhaps I was slightly misleading. The Economist recently remarked that about 95 percent of commentators were still very optimistic at this time. I should really have said there was a debate among informed overseas commentators. As I have had on occasion to comment, such as in Self-interest Rates, most commentators in New Zealand are unreliable, either because it is they are being paid to talk the market up, or because they are uncritically reporting the unreliable. I regularly read commentators – in overseas periodicals I subscribe to, and also friends pass on major Northern Hemisphere dailies they read via the net – who are of a much higher quality than the conventional wisdom. They use analytical models rather than ideology, grounding them in facts rather than wishful thinking, and have a sense of history rather than ignoring it. Moreover, they are usually cautiously trying to understand the situation, rather than imposing some ideological or client model – all characteristics I admire and try to imitate.

Eighteen months later I am remained pleased with two features of this column. First for its focus on the analysis of Joseph Schumpeter, an economist I much admire. Second, for its identification of the balance sheet problem. While the problem was, obvious a year later it was not then. But I had been through the trauma of the 1986-7 New Zealand boom and bust, an experience which has given me insights that even some of the best informed overseas commentators did not have. Our boom and bust, is a sort of precursor of the US one a decade later, although we do not have the saving grace of a major technological driver.

Six weeks after, returning from an overseas trip, I returned to the balance sheet problem in a recession, illustrating it with some Japanese examples in A Little More Than Kin (12 May 2001). Informed commentators worry about Japan because it has had ten years of severe recession. There is a continual concern that its experience foreshadows the US one. (The standard article compares all the commonalities of America today and Japan a decade ago, finds one feeble difference, and ends up ironically saying ‘it couldn’t happen here could it?’) The Japanese sharemarket boom was in the 1980s, resulting in overvalued assets, non-performing debts, and rort balance sheets. Almost every economic policy has failed to correct this misbalance. Almost every column I mention below is informed by the Japanese experience, even when it is not explicitly mentioned. My column of 2 November 2002 addresses why these policies did not work, although there are hints in the columns between.

(Incidentally, Shakespeare scholars tell me that the Richard Brattigan interpretation of Hamlet with which I begin the column is not anywhere in Shakespeare’s script.)

I remained anxious. A month later I touch on the recession themes again in A Surplus of Imitation (June 9 2001). Actually, the column is about two other domestic matters – our uncritical adoption of American thinking, and the need to prepare fiscal policy on the domestic front– but I use the US recession issue to discuss it. Note I am thinking here that the US needs a fiscal stimulus. While I underestimated the ease with which Bush would get one, I also underestimated its ineffectiveness, for reasons I explain in the 2 November column.

My Going Down (20 October, 2001) is my 9/11 column (everyone had to write one). It progresses the argument a little, but it is also about the silliness of the conventional wisdom which thought the terrorist attack would have major impact on the world economy. Have you noticed how they rush from fashionable explanation to fashionable explanation, while the informed commentators have a medium term view of an unfolding drama?

I have included in the list Corporate Crossfire (3 November, 2001) which reviews a book about a New Zealand company collapse I had been intending to do for ages. (I always have a queue of columns.) It is not only to admire the book – Catherine Handleys’ Receiving Orders– but to explain to my readers about the theory of company balance sheets and corporate collapses using a local example.

For a similar reason I have included Hubris of Managers (17 November, 2001) which is about corporate takeovers going bad. Again general principles illustrated by New Zealand examples.

A fortnight later, back to the world recession in Gloomy Days: What if Japan and the US stagnate? (1 December, 2001) – the title is a pun on the film “Gloomy Sunday” which I had just seen. The progress is attention to balance sheet difficulties in a couple of industries (one must still be deeply worried about the balance sheets of the telecom countries). The remark about the Bush tax cuts is almost prescient – certainly it sets up the 2 November 2002 column.

There is an error when I predict that the US would learn it would be in recession in a month. In fact the ‘official’ announcement occurred in the week of the column’s publication. (Bother.) The announcement placed the recession’s beginning in March 2001 – six months earlier. One of the US conventional wisdom commentators on learning this, said that by then (December 2001) the US was recovering from the recession. (Not, you understand, that they had identified the recession earlier.) The point is their employers and clients are so desperately needing an expansion, that they believe it must happen.

Don’t Cry for US Argentina (9 February, 2002) – the first ‘heavy’ column of the new year – is only about a minor player in the world difficulties, but its lessons are instructive and relevant. Moreover there are third world countries struggling, while the first world fails.

Now I admit that despite my earlier premonitions of poor quality corporate balance sheets, I was nevertheless overwhelmed by the mendacity of the Enron accounting. Perhaps if I had known more accounting theory I would have guessed, but … Anyway, I report it in Guard Dogs That Fail To Bark (6 April 2002). It is integral to my analysis that the current financial troubles are about balance sheet problems – about stocks not flows. That is why Schumpeter is more relevant than John Maynard Keynes this downturn. Unfortunately economic accounts of depressions tend to focus on incomes, expenditures and flows, rather than assets and liabilities – partly because that is all the data we have.

I returned to the theme in Corporate Chaos (27 July 2002). The model I am using in which C→M→C* transforms into M→FP→M+ is founded on some notions of Karl Marx in Das Capital and also underpins Karl Polanyi’s The Great Transformation. It is discussed in In Stormy Seas p.244), but I have added – this is the new breakthrough – that it also requires M→FP→M- somewhere else in the system.

So a fortnight later we have Balance of Power: Are Double-dipping US Corporations Symptoms of a Double-dipper World Recession? (10 August 2002). In the short time between when I wrote the column and when it was published, sentiment among the informed definitely moved towards the notion that the US was in a double-dipper recession. So I could not believe it, when on the day I got my Listener with this column I opened up my daily paper to find its business pages led, under the byline of the business editor, with ‘World Recovery On The Way Soon’, quoting various fund managers (including that of AMP Henderson, a fund that has not done too well since). Dominion Post (5 August, 2002).

Perhaps I should add that I am still cautious as to whether there is a double-dipper recession, that is a downswing followed by a weak recovery, and then another plunge. They are very hard to read, even with hindsight (as in the case of the mid 1970s New Zealand downswing, which was probably a double-dipper). The argument for the double-dipper is that the Bush tax cuts lifted the US economy in late 2001 but not in a sustainable way. The possibility is there was not even a lift.

Incidentally, recall in March 2001 I set out the options for the recession as U, V. and L. Some people describe the double-dipper as a W pronounced ‘Dub-yah’.

That is the last column I have written before the November 2002 one. This note is a part of the preparation of writing it. I add that having finished the draft of the column, I opened up my emails to read three further articles which were as gloomy – or gloomier – than my assessment. (Incidentally it is beginning to look that my hopes in the above columns that the European economy could stabilise the world one, may be too optimistic. They may have caught the disease from the US.)

P.S. My analysis does not pay a lot of attention to share prices, other than as they impact on investor’s balance sheets. The reason we spend so much time looking at them is that they are available almost instantly, and there is a vigorous industry which is dependent upon share transactions, and whose ‘analysts’ are funded to be expert on share prices and talk the market up.

The column that comes out of this is The Bubble Bursts published on 2 November, 2002.

After I wrote the above, I came across even earlier columns discussing the phenomenon:
The Year of the Paper Tiger: Asia is in Economic As Well As Financial Crisis (February 1998)
That Sinking Feeling: On Track to Contraction? (May 1998)
In Stormy Seas: Can We Cope When A Wave Broadsides Our Economy? (July 1998);
Intrigue and Deep Recession: Something Rotten in the State of the Economy? (September 1998);
History Repeats: When Will Financial Markets Ever Learn? (November 1998);

History Repeats (November 1998);
The Casino Economy (December 1998).