What is "Normal Growth?"

Matthew Lynn at Market Watch describes the similarity between the current economic conditions and the depression, not of the 1930’s, but the one which began in 1873 and lasted 23 years. I’m not sure that I agree with all of the five points that he makes, purportedly in support of his theory that this recession will not end until 2031.

One of his points made is, for instance, that recoveries can take a long time. How is that a valid comparison to these economic times? It’s nothing more than an observation of historic fact, and a pretty obvious one at that. So what? It offers no evidence that this one will take that long.

He does, however say in connection with that, “when their origins are in a debt bubble they should be measured in decades not years.” Interesting point, but I’m not sure that it needs to be true. The current recession was certainly triggered by a debt bubble and has lasted for a long time (depending, of course, on how you define “recession”), but it has done so because we have never dealt with the debt. It has neither been paid back or written off, but is still being held and, as such, is still an anchor preventing recovery. My theory is that if we had allowed the companies which were financially underwater to collapse and written off all of the bad debt the 1% would be considerably less rich and we would be well on our way to recovery by now. I could be wrong, but there are a lot of people who think I’m not. I didn’t pull that idea out of my ass.

“[W]hen their origins are in a debt bubble they should be measured in decades not years” because nobody wants to deal with the debt, which means writing it off. If it could be paid back, it would not have caused a recession, so forget getting it paid back. It is bad debt and the people who hold it need to take the loss. Instead, we impose even more loss on the taxpayer and make the whole mess worse instead of better by throwing borrowed money at the holders of the bad debt, who now have a bunch of cash in one hand and a bunch of bad debt notes in the other.

He does say one thing that is, I think, brilliantly on point, “The parallel with the 1930s is dangerous, because it has convinced bankers and policy makers that if you can just pump up demand, everything will be okay.”

It’s convinced economists like Paul Krugman, who has an indomitable ability to look at events and draw the wrong conclusions. The sun came up at 6:05am and there was an earthquake at 6:06am, therefor the sunrise caused the earthquake. Likewise, World War Two caused the end of the Great Depression. Or, New Deal spending did that, depending on which theory he’s on at the moment. Of course, New Deal spending ended in 1937 and the economy went back into recession, which would prove to most people that “creating demand” actually doesn’t make everything okay, but…

World War Two created demand all right, but it did that by destroying most of the civilized world. It did not create current demand in terms of prosperity, my parents can tell you that for damn sure. Rebuilding the world after that war destroyed it created plenty of demand and built prosperity at a tremendous rate after that war ended.

If I’m building houses and the market has become so glutted that there is no demand for new houses, my business is going to suffer a depression. I can create demand by blowing up my neighbor’s house, can I not? He’ll need a new house and I get to build it, so there you are. That’s what World war Two did. I doubt we’re going to see anything like that to create a demand big enough to end this recession.

“The global economy,” he says, “will eventually get back to normal growth,” but I’m not so sure it will. When you start putting beans into a jar, for a long time it appears that there is no time in the future that you will ever have to stop putting beans in that jar. But the capacity of that jar is not infinite and at some point it fills up. There are some 7 billion people on this planet, and I’m not sure that 7 billion people can live the same way that 5 billion did. I suspect that what we have been defining as “normal growth” may have become “unsustainable growth,” in which case it isn’t coming back.