GDII?

The Great Depression II (or Great Recession for the optimist) has taken most of us by surprise. Its most astonishing feature certainly is the speed with which the financial crash has been hitting trade, way beyond the global credit crunch generated by the interbank crisis. The credit crunch should have been more moderate after the recapitalization of major lenders and the injection of liquidities which took place almost immediately and on a massive scale. Even if we take into consideration the additional force of the end-of-cycle recession which was due in any case, both the magnitude and velocity of the impact on trade could not have been expected at this level. This means that most economic actors (even those who were not yet directly affected in their current production capacity and did not observe a sharp decline in demand on their own segments) overreacted in their anticipation of a market crunch, creating a self-fulfilling prophecy. In other words, negative expectations went much faster than the negative mechanical effects which are unfortunately still to come as a direct consequence of the ongoing stock market crash, e.g. reduced offer from undercapitalized corporations and declining consumers’ demand from both unemployed and retirees.

In front of such a disaster, even the nationalizing of major financial institutions and industrial leaders, together with a continuation of the lowering of interest rates (possibly even briefly to negative levels, which can become an option if governments and central banks start being considered as the only reliable borrowers), is unlikely to be enough for the job. Large public deficits now look inevitable, in order to both reflate the system and amortize the social turmoil to start anytime soon. Governments shall be tempted by the ‘wise’ approach of new infrastructural investments. They are yet bound to take care of consumers if they want to avoid the collapse of the two pillars of the entire modern growth: automobile and real estate (the growth of services being ultimately associated to the one of final products). New technologies are unfortunately not well placed to be chosen as the core of reflation: bio techs represent for the time being an insufficiently productive additional burden for governments, while green techs are temporarily competing again against low cost traditional energies. As to renewed military spending, no one in his own mind can consider it seriously, at least until the main mistakes of the Bush administration are repaired.

In theory, stimulating demand by large public deficits can be done without uncontrolled inflation as long as the previous level of liquidity is not substantially restored. It has been done in the past, but not on the scale to consider now. We are thus entering unknown and probably stormy waters. Let’s hope for the best as

This is how the world goes.