Epic Recession

Prelude to Global Depression

By Jack Rasmus

Pluto Press

Copyright © 2010 Jack Rasmus
All rights reserved.
ISBN: 978-0-7453-2998-7

Contents

Introduction: Epic Recession — Past, Present, and Prologue,
PART ONE: THEORY,
1 Quantitative Characteristics of Epic Recession,
2 Qualitative Characteristics of Epic Recession,
3 The Dynamics of Epic Recession,
PART TWO: HISTORY,
4 U.S. Depressions in the Nineteenth Century,
5 ‘Type I’ Epic Recession: 1907–14,
6 ‘Type II’ Epic Recession: 1929–31,
PART THREE: EPIC RECESSION, 2007–10,
7 The Epic Recession of 2007–10,
8 The Bush–Obama Recovery Programs,
9 An Alternative Program for Economic Recovery,
Glossary of Key Terms,
Notes,
Index,

CHAPTER 1

Quantitative Characteristics of Epic Recession

Chapter 1 and Chapter 2 that follows together provide a preliminary definition of ‘Epic Recession.’ These chapters identify and describe static characteristics that differentiate Epic Recessions from ‘normal’ recessions or a depression. Chapter 3 will describe dynamic characteristics that further distinguish Epic Recessions from normal recessions or depression.

Static characteristics may be either quantitative or qualitative. If quantitative, the question arises, what is the 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 (quantitative) and/or uniqueness (qualitative) therefore serve as essential starting points for distinguishing Epic Recessions from normal recessions and depressions.

THREEFOLD CHARACTERISTICS OF EPIC RECESSION

This chapter considers five important quantitative characteristics that differentiate Epic Recessions from normal recessions. They include the depth of the economic decline, its duration, and levels or degrees of debt, deflation, and default.

The qualitative characteristics addressed in Chapter 2 include financial instability and fragility, a large shadow banking system, consumption fragility, a shift to speculative investing relative to traditional forms of investing, and global synchronization of the crisis.

Dynamic characteristics of Epic Recession discussed in Chapter 3 include several sets of particular relationships that are complex and interdependent. These include relationships and interdependencies between speculative and non-speculative forms of investing; between speculative investing and debt; between debt, deflation, and default; between defaults and financial and consumption fragility; and, finally, between government fiscal and monetary policies and the key processes of debt–deflation–default and fragility. The dynamic characteristics thus focus heavily on the processes by which quantitative and qualitative characteristics mutually determine each other in various causal relationships, transmission mechanisms, and feedback processes.

Of the five quantitative characteristics addressed in this chapter, the first two — depth and duration — are primarily descriptive. They describe the degree to which Epic Recessions differ from normal recessions. That is, Epic Recessions are more severe in terms of both their depth of decline and their duration than are normal recessions. More severe as well are the remaining three quantitative characteristics: debt, deflation, and default. However, these latter three are important to Epic Recession in more than just degree of severity. They are central, and distinguish Epic Recession for more fundamental reasons as well. Epic Recessions are set in motion by financial instability and crisis. As will be shown, this is quite unlike normal recessions, which are not precipitated by financial instability and crisis. It is the accumulation of debt and price inflation that create the financial fragility that leads to the financial crisis event. Moreover, once the financial crisis erupts and evolves, it is once again debt and price that play a key role. Specifically, it is now the reversal — i.e. the unwinding of debt and now price deflation — that results in the deepening and spread of default — bank, non-bank business, and consumer alike — that subsequently drives the real economy into Epic Recession. Thus, it is not simply that debt–deflation–default are more severe in terms of level or degree in the case of Epic Recession compared to normal recession. The three characteristics are also critical elements that, along with other key elements described shortly, drive a transition to Epic Recession. In a sense, therefore, it is debt, deflation and default that in turn produce the more severe depth and duration characteristics associated with Epic Recession.

Of course, even more fundamental are those forces that produce the excessive debt accumulation and price inflation in the first place, creating a condition of financial fragility that ultimately provokes the financial crisis. As will be discussed in more detail in the next two chapters, the key to the more fundamental forces is the major shift to speculative forms of investing and the growing weight and mix of those forms compared to non-speculative forms of investment in the economy. Understanding what underlies that speculative shift takes analysis even deeper. And once the financial crisis has erupted and the transition to Epic Recession has begun, on the ‘downside’ or the ‘bust phase’ of decline yet more forces begin to play a contributing role to the transition to Epic Recession as well. But more on all that subsequently. For the remainder of this chapter, it is necessary first to understand simply in a static sense how debt–deflation–default, and depth and duration, are characteristics of Epic Recession.

QUANTITATIVE CHARACTERISTICS OF EPIC RECESSION

The characteristics of depth are measurable in several possible ways. This chapter identifies five such ways or indicators by which to distinguish depth in an Epic Recession: gross domestic product (GDP), employment, industrial production, exports, and the stock market.

The duration characteristics are measured in terms of what is called the ‘peak to trough’ of an economic decline — i.e. how long in months or quarters that the decline continues from its immediate pre-recession high point to its recession lowest point, and thereafter how long it takes from the low point to return to the previous high point. The ‘peak to trough’ to recovery may describe a recession either as a ‘V’, an ‘L’, a ‘U’, or a ‘W’ in duration terms. ‘V’ represents a sharp decline and just as sharp a recovery; ‘L’ a long-term stagnation following the initial decline; ‘U’ a decline followed by a lengthy period before recovery; and ‘W’ a double-dip decline, followed by recovery, followed by another decline and recovery.

The debt characteristic is defined as total debt, which includes public debt (federal, state, and local government), consumer debt, and business debt — the latter of which can be segmented in turn into bank and non-bank business debt. Whether the debt is short term or long term in its payment structure is also a factor, as is the interest rate level and total cost of the debt repayment as well. Deflation is defined as a negative price change. Three kinds of price systems are included in the consideration of deflation: asset price deflation, product price deflation, and labor market or wage deflation. Wages are defined broadly, not simply as hourly wage rates. Wages include weekly earnings, and thus are inclusive of hours worked, as well as other forms of pay such as fringe benefits and paid time off (paid vacations, paid holidays, sick leave, etc.). Finally, default is considered in terms of several elements, including financial institution insolvency, non-bank business bankruptcy, consumer delinquencies (involving combined mortgage and installment debt), and public sector default that may include even government bond defaults by both state and federal governments.

What, then, it might be asked, are the respective levels of depth of decline, duration, debt, deflation and default that are necessary to characterize a recession as ‘Epic’ in contrast to a normal recession or a depression? Answering this question allows a discussion of the current crisis quantitatively, i.e. in something more than vague general terms like ‘Near Depression’ or ‘Great Recession,’ as many economists and commentators have been content to do to date.

DEPTH AS A CHARACTERISTIC

GDP as a depth indicator

If GDP is used as an indicator of depth, then Epic Recessions are associated with a decline in GDP for at least two quarters of between 5 percent and 15 percent.

This compares with normal recessions globally that on average experience GDP declines of 2 percent over the course of the recession and rarely for more than one quarter of more than 4 percent. The 5–15 percent for Epic Recession also contrasts with depression GDP declines of 15–40 percent or more over a longer duration of decline. For example, the worst period of the U.S. Great Depression, from 1929 to 1933, witnessed a drop in GDP from $103.6 billion to $56.4 billion or, in percentage terms, 45.6 percent.

A study in early 2008 of the ‘big five’ post-1945 recessions globally prior to 2007 (Finland, Sweden, Norway, Spain and Japan), predicted in early 2008 that the current U.S. crisis might be even worse than the worst recessions globally. The study predated by months the deep decline in U.S. GDP that occurred in the fourth quarter of 2008. The ‘big five’ economies in question had ‘peak to trough’ declines of less than 5 percent. The decline of the U.S. economy from October 2008 through June 2009 witnessed GDP declines of 6.1 percent, 5.7 percent, and 1.5 percent, respectively — thus making the recent U.S. decline decidedly worse than even the prior ‘big five’ global recessions to date.

In the U.S. since 1945, the National Bureau of Economic Research (NBER), the organization that dates and analyzes recessions in the U.S., identified ten normal recessions from the late 1940s to 2007. The Federal Reserve Board of Minneapolis website has mapped these recessions. Its mapping shows, in all nine cases, recovery beginning, or the decline stabilizing, after only six months from the start of each recession. Eight of the nine recessions, moreover, were clearly rapid ‘V’-shaped recoveries, the 1973–75 recession being the sole exception. This ‘V’-shape trajectory of prior ‘normal’ recessions in the U.S. is not shared by the current Epic Recession.

What the above comparison of prior normal recessions in the U.S. and the current Epic Recession reveals is that the current Epic Recession of 2007–10 clearly eclipses all prior recessions in the U.S. in terms of the depth of decline, when measured in terms of GDP. But alternative measures of depth are also possible. They may include total jobs lost, the unemployment rate, industrial production, global exports, stock market indices, etc. These alternative measures record even more severe depth of decline for the current economic downturn when compared to prior normal recessions in the U.S.

Unemployment as a depth indicator

In terms of unemployment levels, in an economy the size of the U.S., an Epic Recession occurs when 15 million or more lose their jobs and the unemployment rate exceeds 10 percent.

Given an economy and work force the size of the U.S. (approximately 153 million), a normal recession would result in job losses of less than 15 million and an unemployment rate below 10 percent. Were there a Depression today in the U.S. similar to that of the 1930s, it would mean a job loss today of 38 million or more and an unemployment rate of 25 percent. In the Great Depression of the 1930s in the U.S. the total workforce was about 40 million. Around 10 million officially went jobless and the unemployment rate officially reached 25 percent by 1933. (These numbers may have been an underestimation since they do not include farm labor unemployment. The jobless levels may have been as high as 13 million and the true unemployment rate therefore well over 30 percent, in fact.)

An Epic Recession in today’s U.S. economy means job losses of more than 15 million but less than 30–38 million, and an unemployment rate between 10 percent and 25–30 percent. The unemployment rate for the purposes of our definition here is measured by what is today called the ‘U-6’ unemployment rate, which includes involuntary part-time workers, discouraged workers, and others without jobs but willing to work if offered a job. After 20 months from its start the official government unemployment rate had risen from 4.9 percent to 9.8 percent, but the U.S. Labor Department’s more accurate U-6 unemployment rate rose to 17.0 percent. That 17 percent is still a long way from depression levels of 25–30 percent, but well above unemployment rates in prior ‘normal’ recessions in the U.S. which typically ranged from 6 percent to 10 percent at the worst stage of the recession.

Those who argue that the current Epic Recession is no different from the worst of the prior recessions in the U.S. tend to compare the current downturn with the two worst prior recessions of 1973–75 and 1981–82. Those who compare it with 1973–75 argue that the GDP decline during 2008–10 was no worse than in 1973–75. Others focus instead on comparisons of unemployment rates today with the recession of 1981–82. But the comparison of 2008–10 with 1981–82 in terms of even ‘official’ unemployment rates is grossly misleading. The most recent official unemployment rate of 9.8 percent for 2007–10 is actually far worse than for 1981–82. This again is partly due to changes in the way unemployment data are now gathered and manipulated. But it is also true because of major structural changes in the labor markets in the U.S. since 1973 that make the three periods non-comparable. First, there was no U-6 unemployment rate in the 1970s and 1980s. The numbers of involuntary part-time, discouraged, and marginally attached but willing to work were far fewer then compared to today. The growth in involuntary part time, discouraged, and temporary workers — sometimes called ‘contingent labor’— is largely a phenomenon that has grown since the 1980s and at an accelerating pace. Today’s U-6 unemployment rate of 17 percent is almost certainly much higher than anything that might have been comparable in 1981–82 and 1973–75.

Epic Recession can also be compared to normal recessions in terms of cumulative total job loss after 18 months into the downturn. In normal recessions in the U.S., the cumulative job loss after 18 months of recession was on average 2 percent of total employment. What are generally identified as the ‘worst’ of the normal recessions — 1973–75 and 1981–82 — in the U.S. had a cumulative job loss after 18 months of 1.7 percent and 2.9 percent, respectively. In contrast, the current Epic Recession had a cumulative job loss after 18 months of 4.5 percent of the total workforce — in other words, twice as severe compared to the previous nine normal recessions in the U.S. Furthermore, after 18 months the current Epic Recession has continued to lose jobs well past the 18-month point at which other normal recessions had clearly begun to reverse the process and recover jobs.

Still another illustration of how the 2007–10 recession is not really comparable with 1981–82 is the especially rapid rise in joblessness in just the past year, 2008–09. When properly calculated in U-6 terms, approximately a million jobs a month were lost from November 2008 to May 2009, and about a half million a month thereafter. Much publicity has been made of the apparent slowdown of job losses during the summer of 2009. Officially (i.e. not measured in terms of U-6) 200,000 to 300,000 jobs were lost each month in August–September 2009. However, not mentioned is that a million jobs also disappeared in those two months as a result of workers simply leaving the workforce. Those million jobs are not included in the official calculations of the unemployment rate. Even when adjusted for the smaller size of the labor force in 1981–82 and 1973–75, nothing similar in terms of the massive collapse of jobs in the year October 2008 to October 2009 has ever occurred on such a scale in any prior recession in the U.S. Nor have so many simply left the labor force itself in such a short period.

In an earlier publication this author had predicted in February 2008 that there would be mass layoffs coming at the end of 2008; and subsequently, in December 2008, predicted that unemployment would reach 20 million by the end of 2009. In retrospect, those numbers now appear overly-conservative. Unemployed levels by the end of 2009 may now quite possibly range between 22 million and 24 million. In terms of various employment measures, in other words, the recent recession has been clearly Epic in character.

Apart from the obvious measuring of depth in terms of GDP or employment, it is also possible to measure depth of decline in terms of industrial production, global exports, or stock market decline. And here, once again, a similar picture emerges, clearly distinguishing Epic Recession from earlier normal recessions.

(Continues…)Excerpted from Epic Recession by Jack Rasmus. Copyright © 2010 Jack Rasmus. Excerpted by permission of Pluto Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.