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  1. Wealth
January 21, 2009

Crashing cycles

By Spear's

Is the world is set for a truly horrendous decade that could see a long recession of up to ten years?

In the Autumn 2008 issue of Spears was an article called Gordon Fool about business cycles. This article addressed the issue of the short and long business cycles and their interaction.

It posited that the short cycle downturn was 2009, whereas the long cycle of ninety years, give or take ten years for man-made and natural distortions, was indicating its major downturn in 2020.

The article left it to the reader to form their own view, given the margin of ten years, as to whether both the short and long cycles have both hit bottom in this Global Crunch in 2009.

At least one serious economist has raised just that possibility in the current crisis. Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble, said in January 2009: ‘We could have many years of a very weak economy.

‘Big recessions are followed by years of weakness and typically unemployment keeps rising. To say this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness. This is no ordinary recession.

‘There are signs that people see this as a different story. People are talking about a depression, something that we haven’t seen previously.’

Shiller is clearly picking up on the principle of change in these remarks. The important point is that both the short and long cycles do exist, so the short cycle is not operating between parallel lines, as it were, but between bent lines with on average forty-five year troughs for some and ninety year troughs for others, always given the ten year distortions of natural or man-made causes.

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These distortions include natural disasters, such as volcanoes and hurricanes, droughts and disease, and man-made disasters such as protectionist policies, massive bankruptcies and credit crises, insurrections, wars and political upheavals, which distort the cycles and change the course of history quite dramatically.

The inference is that if Shiller is right, the world is set for a truly horrendous decade that could see a long recession of up to ten years, or at least the effects of it lasting for ten years in certain sectors and regions.

Depression is a distinct possibility, and so is super-stagflation, widespread bankruptcies and foreign exchange turmoil. And starvation, protectionism, civil unrest and conflict are possibilities. It might even be worth asking William Hill for their odds on a major volcano on the Kamchatka Peninsula going off and adding to the worldwide gloom!

And the gloom has intensified in the first days of January 2009, as it has become clear that the bank bail-outs in the US and UK in Q4 2008 were not nearly big enough as the banks lost all that in – Q4 2008!

The central bankers find themselves in the same predicament as the unfortunate Macbeth: ‘I am in blood stepped so far that, should I wade no more, returning were as tedious as go o’er’; for ‘blood’, now read ‘red ink’.

So there’s a second dose of billions in the Anglo-sphere and Eurozone worlds on its way to the banks, as the money runs out of the front doors of the banks quicker than the central banks can top them up from above.

And now Denmark has a bank bail-out, and Germany needs a big one too, following Ireland and Switzerland and Austria, and the rest, while Britain, Spain and Ireland are engaged in large second-round bail-outs but there’s no guarantee these will be more effective than the first.

And Gordon Brown, once bitten, twice shy, won’t even give a figure for the extent of the government’s insurance scheme to cover bank’s toxic assets, as he effectively hands a blank check to the bankers who caused the crisis in the first place.

And the US, UK, EU and China and others have announced $3 trillion in fiscal stimuli, in addition to the $10 trillion of cash and guarantee bank bail-outs.

And interest rates are at or headed to zero, signifying that paper money’s value is itself under question, but at some point the world is literally going to run out of credit.

As the point could arrive quicker than you think in 2009, it’s worth taking a preview of the forward issues here. If all the available capital in the world cannot create an inflation-led recovery, then the debt deflation syndrome will kick in and the debts themselves will drown out any recovery as asset prices, including the bond markets, collapse in relationship to their debts secured on them.

This is why central banks are resorting to QE on a massive scale: the Fed’s balance sheet footings have swollen from $800 billion in September 2008 to $2.8 billion at the year-end.

If QE does the trick before the world runs out of money, then the problem becomes one of containing the following inflationary upsurge, which means interest rates will have to rise quickly, which will also have the effect of choking off recovery, and possibly lead to super-stagflation, and yes, for a decade.

It’s just like the Irishman who asked the way to Tipperary: ‘Well, if you wanted to go to there, I wouldn’t have started out from here’. Yes, it could well be a ten-year slump we’re heading into, and if we hadn’t started out from wherever we did, we certainly wouldn’t have ended up here…

‘At least there’s a ray of hope,’ said the Irishman. ‘There’s a black man going into the White House. Now that’s never happened before!’ All eyes will now follow events in America, whence our salvation may well cometh.

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