Wednesday, June 29, 2011

Ten Year Itch

Have you noticed that we have had recessions in 1980, 1990, 2000 and 2010? What is spooky is that we have also had recessions at the start of each decade since the inception of the
republic: 1800, 1810,. 1820, 1830, 1840, 1850, 1860, 1870, 1880, 1890, 1900, 1910, 1920, 1930, 1937 (oops), 1950, 1960, and 1970. Every one of these we preceded by asset bubbles (irrational exuberance). Lets just go back to the more recent ones. In 1980 I was at the National Credit Union Administration having to deal with collapsing credit unions who were going to be forced to close because of loss of corporate sponsor. We converted the viable ones into community charters to save the credit unions and to save the insurance fund. The recession was the most significant since the Great Depression. I know we all seem to think that history begins yesterday and say the current downturn is "the most significant" but the recession of 1980 had double digit unemployment, inflation and interest rates. This one doesn't even come close. That recession was precipitated by high government spending, incompetent monetary policy (sound familiar?) and high oil prices. The recession of 1990 was precipitated by a burst in the real estate bubble (sound familiar?). The 2000 recession was preceded by the burst in the tech bubble. The current recession is due to the real estate bubble bursting. One of the differences in this recession is that the government and the Fed have striven to use discretionary policy to either prevent or slow down the recession. They have succeeded but have also failed. By doing so they have flattened out the recession. Instead of letting the bottom just happen they have just significantly grown the debt shoveling good money after bad. The result is that the "recovery" has been among the slowest in our history. It is ironic that the architect of the recovery in 1980 - Paul Volcker - was on the early Obama team. Volcker broke the back of his recession by the use of tight monetary policy. He told us that things would get worse before they get better and he was right. But when the economy came out of the recession it grew at rates in excess of 6 percent. This "recovery" is less than 2 percent and can be accomplished by increases in productivity rather than employment hence it term "jobless recovery". Where is Paul Volcker when we need him? In place we get gutless Ben Bernanke. So look for another recession in 2020. The question is what bubble bursting will cause it? My money is on commodities (gold).

1 comment:

Colonnese '09 said...

I second the gold bubble prediction! Although I think it'll happen sooner... Fools.