[p2p-research] The meltdown and its timing

[Michel Bauwens]

If you want to know if there is any objective measure by which to estimate
the timing of the recovery between kondratieff 6 and 7, then this article is
an absolute must read.

In its entirety, see
http://www.debtdeflation.com/blogs/2009/07/27/rudds-essay-is-on-the-money/

For a summary of the argument:

“Those who expect a swift return to the business-as-usual of 2006 are
fantasists. A slow and difficult recovery, dominated by de-leveraging and
deflationary risks, is the most likely prospect.” (Martin Wolff)

As most readers of this blog know, I have my own timeline for p2p-induced
transformations. It goes roughly like this: given that 2008 was a systemic
shock of the same nature as the crisis in the 1890’s and 1930’s, we should
expect 8 to 15 years of deep crisis, i.e. the time for the excess debt of
the system to be processed, i.e. the time for deleveraging or ‘debt
deflation’. Not being an economist, I simply draw this inference from the
past historical experiences, showing that such recovery processes were never
quick. (after this period of recovery, I expect a new Kondratieff long wave
cycle, but complicated by the structural crisis the earth is facing due to
climate change and resource depletion).

But what if we could calculate this period more precisely?

Australian-based economist Steve
Keen<http://www.debtdeflation.com/blogs/2009/07/27/rudds-essay-is-on-the-money/>thinks
we can do this, by calculating the debt to GDP ratio of the start of
the crisis, and positing a 4 to 8% deleveraging rate, 4% being the natural
rate and 8% the rate that can be reached through smart policies (”where
however that “policy” was an arms race during a global military conflict”).

Important is that we are starting from a much higher debt to GDP ratio than
in previous crisis, instead of the 100% of the 1890’s and the 50% of the
1930’s, we started from a high point of 165% in March 2008. (figures are
from Australia)

OK, here are the shockers, based on calculating the Australian case:

*“Taking 50% of GDP as a level at which normal economic activity might
resume (higher than the 40% level that applied in the 1920s and 25% level of
the 40s-60s), this implies that deleveraging could take anywhere between 15
years (at the accelerated 8% rate) and 30 years (at the “natural maximum” 4%
rate).*

*…*

*We are currently deleveraging at the 4% rate, and debt has fallen from 165%
of GDP in March 2008 to 159% today–a 6% fall as a percentage of GDP, as
noted above. At this rate, debt will not fall below 50% of GDP until 2038,
and the annual reduction in debt will be equivalent to 3% of GDP until 2028.
*

*Even the worst rate of 1930s deleveraging (including WWII) only just
compares to the impact of deleveraging today at the 4% rate–because the debt
ratio in 2008 peaked at 2.2 times the peak level in the 1930s. And
throughout the 1930s, deleveraging never subtracted more than 3% from
GDP–again because debt was so much lower then than it is now.*

*If we rely upon the “natural maximum” process of deleveraging, we face a 30
year period in which changes in debt will cut at least 3% from the growth
potential of the economy.”*

Here’s is the conclusion of the article:

*“This is why I propose a far more radical policy to deal with the crisis
than the government stimulus package that Australia and other OECD nations
have followed to date. These policies are attempting to address a crisis
caused by irresponsible private lending, yet they involve continuing to
respect this debt. They attempt to counteract private deleveraging by
running up public debt instead. And they drastically underestimate the
impact of deleveraging: rather than achieving a return to growth by 2010,
these policies alone are likely to result in zero or sub-zero growth for
most of the next decade.*

*That private debt does not deserve respect. It was irresponsibly lent in
the first place, and the financial institutions that lent it should pay the
price–not the public nor the public purse–via deliberate debt reduction.
This of course would bankrupt those financial institutions, but as should be
obvious from the US experience, these institutions are effectively bankrupt
already.”*


-- 
Work: http://en.wikipedia.org/wiki/Dhurakij_Pundit_University - Research:
http://www.dpu.ac.th/dpuic/info/Research.html - Think thank:
http://www.asianforesightinstitute.org/index.php/eng/The-AFI

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