New Depression differs from Great Depression

Time to recognize pitfalls of private capitalism

What the United States—more accurately, the world capitalist system—is currently going through is the New Depression (ND) with hallmarks and features that are entirely its own. It is different but no less a depression than the Great Depression (GD), which engulfed the U.S. economy from 1929 to early 1940s. For those who are deaf to all warnings, let me holler, “Folks, we are in a depression. We have been since late 2008.”

by Shelton Gunaratne

(September 04, Washington DC, Sri Lanka Guardian) What the United States—more accurately, the world capitalist system—is currently going through is the New Depression (ND) with hallmarks and features that are entirely its own. It is different but no less a depression than the Great Depression (GD), which engulfed the U.S. economy from 1929 to early 1940s. For those who are deaf to all warnings, let me holler, “Folks, we are in a depression. We have been since late 2008.”

I was skeptical about all the negatives of the U.S. economy, just like most other Yankee Doodles, until I read a very convincing newspaper article written by a Sri Lankan electrical engineer turned global economic analyst. He also served as the dean of engineering at the Hong Kong Polytechnic University. (A cursory browsing gives me the impression that Sri Lanka news media pay more attention to global affairs than the average American news medium does.)

Professor Kumar David, the author of “Essays on the Global Economic Crisis” (2010), argues that the four decades following World War II saw the global capitalist system’s most spectacular period of growth, innovation and dynamism, ever. Now, about 70 years after the GD, the capitalist system has entered a pathological (diseased) stage for reasons rooted in “the histology (basic tissue structure) of capitalism.” The 2008 Great Financial Crisis (GFC) slammed the U.S. economy (and the globalized capitalist world as well) marking the arrival of the New Depression. Let us not fool ourselves by calling it a recession, which normally lasts between six months (1980) to 18 months (2008).

The National Bureau of Economic Research (NBER) defines a recession “as the time when business activity [such as employment, industrial production, real income and wholesale-retail sales] has reached its peak and starts to fall until the time when business activity bottoms out.” A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. 

Short-term business cycles are a regular feature of the capitalist system. I learned about them as an undergraduate majoring in economics at the British-style University of Peradeniya, where I also studied John Maynard Keynes (1883-1946) who advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. Keynes's magnum opus, the General Theory of Employment, Interest and Money, published in 1936, challenged classical economics summed up in Say’s Law, which, simply put, asserts that supply creates its own demand. Many believe that Franklin Roosevelt’s New Deal implemented during the GD owed much to Keynes’ advocacy of deficit financing, the same strategy that Barak Obama is trying to follow, together with an array of other remedies, to rescue private capitalism during the ND by injecting a heavy dose of state capitalism (so misnamed to confuse the breed of Americans who cannot bear the thought of socialism ultimately coming to the rescue of tottering capitalism). 

Mainstream economics pays little attention to long-duration economic cycles called Kondratieff waves although world systems analysts do. These are economic cycles of major capital goods expansion that play out over a period ranging from about 40 to 60 years and underlie the usual boom-bust cycles characteristic of a capitalist economy. They seem to occur between depressions. David describes the GD as W-shaped because it featured two massive recessions—one in 1929-33 followed by a slow recovery and then the second recession in 1937-38. 

[The depression that preceded the GD occurred 50 years earlier from October 1873 to March 1979. It is interesting to note that the depression preceding that of 1873-79 also occurred 50 years earlier from 1815 to 1821.]

Now, add 40 to 60 years to the end of the GD and we should have expected the ND between 1980 and 2000. But what shows up within this period is another double-dip (small w-shaped) recession of the Reagan Decade (1981-1989)—the first from January to July 1980 engineered by Federal Reserve Chairman Paul Volcker; and the second from July1981- November 1982 engineered by both Volcker and President Reagan. Although this double dip represents the deepest and the longest of the seven recessions that followed the GD, David dismisses it as unrelated to the natural course of business cycles because it arose from Volcker and Reagan’s tight monetary policy to combat inflation. 

Neither the final recession of the 20th century (between July 1990 and March 1991) nor the first recession of the 21st century (from March to November 2001) turned into a depression. I am wondering whether the Volcker-Regan interference with the natural course of the business cycle had a delayed effect on the real beginning of the natural ND.

However, David traces the beginning of the ND to the 2008 GFC, the worst financial crisis since the GD. NBER states that it was actually an 18-month long recession (from December 2007 to June 2009) during which the civilian unemployment rate exceeded 10 percent and the GDP declined more than 5 percent. Moreover, the GFC had global repercussions, including collapse of large financial institutions, bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market was also affected. Wikipedia elaborates:

The subprime mortgage crisis led to the collapse of the U.S. housing bubble. Falling housing-related assets contributed to a global financial crisis, even as oil and food prices soared. The crisis led to the failure or collapse of many of the United States' largest financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG, as well as a crisis in the automobile industry. The government responded with an unprecedented $700 billion bank bailout and $787 billion fiscal stimulus package.

To avoid the effects of another crash, investors set up programs for automated activation of margin calls to automatically sell-off stocks if markets fell below a trigger level. This explains the rout in global stock markets during the first 10 days of August 2011.

David surmises that the ND will likely take a Wobble-U shape (very long duration) unlike the GD, which had a W-shape because it included two recessions. “The panic selling of early August followed by a hesitant swing back too can be understood as wobbling and hobbling, dipping and rising, while staying near the bottom of the graph,” he contends.

David adds, “The [August] panic was also gross overreaction. There may be a mild second-dip recession in the coming months, or the global economy may bump along near the pits of GDP growth rates and unemployment, but a second large collapse like the 2008 GFC is unlikely right now.”

Obama is trying to prevent a global economic collapse through vast state and global agency interventions. “Teams of doctors are sustaining the patient on life-support; a never before seen global endeavor is being made to bail out world capitalism. Gigantic collapses are being deferred,” David says.

“Instead of a god-almighty catastrophic collapse, ND will have its life prolonged by ministrations and new medications. In the coming years we will witness a procession of ups and downs, spurts of recovery and grinding setbacks.”

Let me conclude by citing Buddha, who taught us that existence involved the interaction of anicca (impermanence), dukkha (unsatisfactoriness/suffering) and anatta (no self). So, folks, brace up to face the Wobble-U Depression over the next several years. ND may teach us that nothing is eternal, that dukkha is the norm of life, and that self is an illusion. Buddhism holds that interdependence is a universal truth. The unfolding depression will attest to that.

Tell a Friend