World economy heading for a double dip recession?

August 9, 2009 by Keith Hart

A friend sent me a link to an article, ‘World at risk of double dip recession‘ and asked if I agreed.

By Economics correspondent Stephen Long.

I wrote the following in response:

Hi,

I have moved away from thinking of the economic crisis as a single global event. I am reminded of what was long known as ‘the great depression of 1873-96’ and turned out to be a squeeze on returns to rentier capital in Britain as a result of US and German competition. The rest of the world economy was booming. If the prediction is that another credit crunch could be on the way or the world economy might muddle through, who could disagree? The important point is the analysis underlying the prediction and who it most affects.

I agree with two of his arguments: that Europe’s banking system is massively overexposed and has done nothing so far to deal with it; Europe, in my view, will be the permanent major loser from this crisis. China’s politburo is financing a credit bubble of its own to avoid mass industrial unemployment and the country could blow up at any time. The US and UK have both taken quite radical steps of a Keynesian sort, while trying to cover up the shit on the books, as he says. Here the main risk is hyperinflation when the bond market collapses. Japan and Germany are the biggest losers so far because of fiscal conservatism and loss of manufacturing markets, but they are less likely to suffer a ‘meltdown’.

Russia is going through an elite crisis focused on Putin (KGB and state power) and Medvedev (Petersburg liberals) respectively; its underlying economy and demography are in terrible shape. IBSA (a South-South association involving India, Brazila dn South Africa) seems to me not a bad bet, one reason I bought into Durban (a good place too to sit out world war 3). India will be a longrun winner and Brazil looks OK too. What about South Africa and Africa? My prognosis is quite hopeful, but Vishnu Padayachee and I are writing about that now. Above all, and this is the least palatable conclusion I have for an American radical, my money is on the US to emerge from all this stronger than before. Why? Because it is still (with India) the only democracy, in Madison’s sense of being able to throw out governments, including Obama’s. And because the future of the world economy is digital commerce and the US (especially California) still leads in hardware, software and content for that market.

If you want my best guess it is that the present political cover-up by the boys who gave us neoliberalism will not work. The US and UK will be unwilling to sit back and watch economic power go peacefully somewhere else. The site of WW3 is already set up as Afghanistan/Pakistan which has the advantage of having Russia, China, India and the Muslim world as neighbours and plenty of western military capacity already in situ. In this case, we are not talking just about an economic crisis of 30s dimensions, but a replay of 1913/14 after the last three decades of financial imperialism went bust. Then it is not just a question of protecting savings, but of what to do in a war. In the meantime, I behave as if it is just an economic question.

So what to do? The whole issue is timing. Markets operate in the short run (‘In the long run we are all dead’ JMK). I have made long run bets to switch a good part of my cash into the Norwegian petrodemocracy, to keep my US pension fund assets and to get out of euros and sterling. The UK has a lot better prospects than Euroland because of the early massive devaluation, but my pension is in sterling, so I am not getting into the UK more than I am already. If I ever consider the US is moving towards inflation, I’ll pull out of there, making a marginal call on how much and when. Generally speaking, I follow what I call the British Treasury model of planning (as opposed to a blueprint model which operates with fixed targets or predictions): we want a stable exchange rate, low unemployment, low inflation, a balanced budget, limited public and private debt and so on; so we make ad hoc moves with our resources to get the best mix of these we can, given that they often contradict each other. Any kind of binary analysis of the up/down, before/after kind is inconsistent with this approach. I don’t know what is going to happen and I hope to retain the flexibility to do something to protect my family, when it does.

All I am doing here is trying to keep my savings from house sales (mine and my dad’s) and pension funds. If we are heading for another credit crunch, then the advice is get into cash, as long as that cash is not produced by a government bent on devaluation via inflation. I don’t trust the recent rise in share values, neither should you. If you decide to sell at what you hope is the top of the market, you then lose if the stock market roars ahead for another six months. This happened to me. I predicted the credit crunch in 2004 and kept the proceeds for house sales in cash until early 2007 when the continuing boom persuaded me that I should give Constance a share of this market just in case it went on much longer. I lost 30% on those funds in the first year and more since. Obviously I wish I had had the nerve to stay with the original bet. But my MO is hedging, not speculation and the hedge option was to be in both funds and cash.

You didn’t ask for this, but I thought I would spend a bit of my Sunday trying to clear my head at your expense and possibly for your benefit.

As ever,

Keith