Epic Recession Rasmus 00 pre 1 13/04/2010 16:38 Rasmus 00 pre 2 13/04/2010 16:38 EPIC RECESSION Prelude to Global Depression Jack Rasmus Rasmus 00 pre 3 13/04/2010 16:38 First published 2010 by Pluto Press 345 Archway Road, London N6 5AA and 175 Fifth Avenue, New York, NY 10010 www.plutobooks.com Distributed in the United States of America exclusively by Palgrave Macmillan, a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Copyright © Jack Rasmus 2010 The right of Jack Rasmus to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 978 0 7453 2999 4 Hardback ISBN 978 0 7453 2998 7 Paperback Library of Congress Cataloging in Publication Data applied for This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental standards of the country of origin. 10 9 8 7 6 5 4 3 2 1 Designed and produced for Pluto Press by Chase Publishing Services Ltd, 33 Livonia Road, Sidmouth, EX10 9JB, England Typeset from disk by Stanford DTP Services, Northampton, England Simultaneously printed digitally by CPI Antony Rowe in England, UK and Edwards Bros. in the United States of America Rasmus 00 pre 4 13/04/2010 16:38 To Ingrid, my wife, best friend and lifelong companion Rasmus 00 pre 5 13/04/2010 16:38 Rasmus 00 pre 6 13/04/2010 16:38 Contents Introduction: Epic Recession—Past, Present, and Prologue 1 PART ONE: THEORY 1 Quantitative Characteristics of Epic Recession 23 2 Qualitative Characteristics of Epic Recession 49 3 The Dynamics of Epic Recession 86 PART TWO: HISTORY 4 U.S. Depressions in the Nineteenth Century 125 5 ‘Type I’ Epic Recession: 1907–14 145 6 ‘Type II’ Epic Recession: 1929–31 164 PART THREE: EPIC RECESSION, 2007–10 7 The Epic Recession of 2007–10 201 8 The Bush–Obama Recovery Programs 245 9 An Alternative Program for Economic Recovery 284 Glossary of Key Terms 315 Notes 320 Index 336 Rasmus 00 pre 7 13/04/2010 16:38 Rasmus 00 pre 8 13/04/2010 16:38 Introduction: Epic Recession—Past, Present, and Prologue Like a global economic pandemic, the financial crisis that initially erupted in the U.S. in August 2007 spread rapidly from housing markets to other credit markets at an unprecedented rapid rate. Leaping national boundaries in a matter of weeks, it infected economies worldwide just as swiftly and deeply. It thereafter quickly transmitted to the real (non-financial) economy in the U.S., driving the latter into recession by December 2007 in just three months. As the real, non-financial sectors of the economy progressively weakened throughout 2008, the financial fragility of the system deteriorated further as well, finally erupting in a second, even worse financial instability event by late summer 2008. The full-fledged banking panic that exploded in September 2008 resulted in a general credit crash affecting all businesses, precipitating mass layoffs unprecedented in scope and magnitude comparable to the early years of the Great Depression of the 1930s. Millions of home foreclosures followed. Consumption nearly collapsed and business investment ground to a halt while world trade, shipping, and exports shrunk at record rates. This was no typical post-1945 recession. Something quite new, and far more severe, was emerging. By late 2008 the accelerating decline of the real, non-financial economy began now to overlap with the financial crisis that was clearly also entering a new, more severe phase. Driven by the faltering real economy, falling asset prices, then prices for products, and finally wages, in turn placed increasing strain on the already weakened financial system. Collapsing asset prices, bank losses and the inevitable write-downs opened gaping black holes in bank balance sheets. Financial institutions across the board followed with a virtual shutdown of entire credit markets. Unable to obtain credit for even continuing daily operations, non-financial businesses continued mass layoffs into 2009, intensified their cost-cutting, reduced prices of their products further, and began cutting wages and hours of work in various forms. Not only were the two crises—financial and real—thus increasingly overlapping, but both were now feeding back upon each other in a dangerous downward spiral. With financial and real economic cycles thus exacerbating each other, the dual cycles that fundamentally differentiate Epic Recessions from other recessions soon began to intensify in a manner not seen since the late 1920s. Like a hurricane that gathers destructive force when wind and water reinforce each other, the convergence of financial and real cycles amplified the combined negative consequences of each. But underlying and driving the dual economic storm are even more fundamental forces. Beside ‘wind’ and ‘water,’ which are only apparent causes 1 Rasmus 01 text 1 13/04/2010 16:38 [...]... characteristics with both normal recessions and classic depression events This often leads to its being confused with a normal recession or even depression Its hybrid quality and instability means that an Epic Recession must either reduce in intensity and transition to an extended period of stagnation or else transform into a classic depression An Epic Recession therefore may evolve into a depression, but it is... transform into a depression? In its alternative trajectory, Epic Recession is only partially checked and contained by government policies It consequently leads to a prolonged stagnation, neither falling deeper into depression nor reverting to a normal recession, until a much more massive fiscal stimulus occurs Epic Recessions do not evolve out of recessions They are not the same animal as normal recessions... choosing to call it either a ‘Near Depression, ’ a ‘Mini -Depression, ’ or a ‘Great Recession. ’ In the debate, Harvard historian Niall Ferguson chose to call the crisis a ‘Great Recession. ’ According to Ferguson, a bona fide depression typically lasts 43–65 months Were the current economic crisis an average or normal postwar recession it would have bottomed out by April 2009 after 17 months.3 According to Ferguson,... epic re ce ss io n emergence of Epic Recession How an Epic Recession thereafter evolves is largely dependent upon the relative magnitudes and causal interactions between the forces of debt, deflation, and default on multiple levels Those magnitudes and interactions are key to the transition of Epic Recession to depression Epic Recession represents a true turning point But turning ‘from what’ and to. .. ushering in the subsequent Rasmus 01 text 11 13/04/2010 16:38 1 2 epic re ce s sio n depressions? Are Epic Recessions in effect potential ‘transition events’ between financial implosions and subsequent depressions? Is it inevitable that, should an Epic Recession occur, it will necessarily lead to depression? Might an Epic event be contained and prevented from transitioning to a depression? If so, what... transform into either classic depressions or periods of extended stagnation It identifies and examines at some length two prior Epic Recessions in U.S history in the twentieth century that resulted in either extended stagnation or depression It then examines the current Epic Recession and considers which prior historical case the current Epic Recession might most resemble: the ‘Type I’ Epic Recession. .. if Epic Recession has different origins and a different dynamic from a typical recession, government policy approaches to dealing with it—whether monetary, fiscal or other—that may succeed in containing a normal recession may not prove successful in containing an Epic Recession In fact, failure by policymakers to understand this may actually contribute toward the transformation of Epic Recession into... differentiating Epic Recession from normal recessions and bona fide depressions, or for understanding the defining characteristics and dynamic processes of Epic Recessions, the reader should begin with Chapter 1 in Part One Part Two, Chapters 4–6, is for readers interested in an historical account of past depressions, recessions, and Epic Recessions as a comparative background and contrast to the current... magnitude of a characteristic necessary to qualify as Epic —in contrast to a lesser magnitude in the case of a normal recession or greater magnitude in the case of a depression? And if qualitative, what are the characteristics that are unique to Epic Recessions that are not present in cases of normal recessions, or are absent in cases of Epic Recession but occur in depressions? Differences in both magnitude... never evolve into depressions In contrast, Epic Recessions are always associated with financial instability events, are imminently capable of transforming into depressions and occasionally do That does not mean, however, that Epic Recession is always and everywhere merely the initial phase of depression Each type of contraction recession, Epic Recession, and depression has its own set of dynamic forces . Epic Recession Rasmus 00 pre 1 13/04/2010 16:38 Rasmus 00 pre 2 13/04/2010 16:38 EPIC RECESSION Prelude to Global Depression Jack Rasmus Rasmus 00 pre 3 13/04/2010. interactions are key to the transition of Epic Recession to depression. Epic Recession represents a true turning point. But turning ‘from what’ and to what’? As a true crisis event, Epic Recession is. may transition into a depression. AN INITIAL DESCRIPTION OF EPIC RECESSION This book attempts to explain that unique form of economic crisis called an Epic Recession. But Epic Recession is not