Is A 1929-Style Stock Crash Likely October 2003 ? - Part 5

August 5, 2003

RECAP ON CYCLES

What are "cycles" anyway? Who do they affect?

Unbelievable quantities of theory exists about economic waves, cycles or periodic variation. Yet the economists who first wrote about cycles - Kondratiev, Schumpeter, Slutsky (apologies to any others who should have been mentioned) - had very different spins on "what cycles mean".

During the 1950s and 1960s there was a concerted attempt by Young Turk mostly American economists, later on called Neoliberals, and after that New Economists (most of them being over 70 years age, now) to deny, disprove or more simply reject any existence of economic cycles. Business cycle - yes. Economic cycle - no.

Schumpeter can be mentioned in the presence of a Neolib/New Economist without having your ear filled with postillons (spittle). Schumpeter is the 'Father of the Business Cycle'. His name can be mentioned in front of MBA fodder in upmarket, fee-paying universities, without you being shown the door. But dont bother with Kondratiev, that is 'freaky' stuff and - hilariously - Kondratiev is sometimes called "the Marxist economist" by eager right wing creatures formerly called Yuppies. Kondratiev died in a Stalin forced labour camp for Thought Crime.

Schumpeter didnt have much against, or for Kondratiev. Their slant was different. Schumpeter had no problem in deciding if Long Depressions can happen. His answer was Yes.

Economic cycles mean periodic recessions and crises and even depressions.

Even here, those 3 words have 'special meanings'. What the 1980-82 period showed in the civilized world is that what happens in dozens of countries, right now, and in accelerating fashion since the 1980s, all over the uncivilized world - that is economic meltdown - can and does happen in the squeakiest clean, modern, hi-tech business-oriented societies. That is strong contraction. Already we have a nice shiny new word for this: demand destruction. This is a lousy term! Contraction is much better. Demand will and can be UNdestroyed anytime. Pay $80-a-barrel for oil and you will see (just a few) Angolans riding in Mercedes Benz with several additional bodyguards wearing Taiwanese Rayban lookalikes. At $100/barrel they might have real Raybans

Un-destroying demand is pretty much like creating demand, and that takes us way back to Keynes and a whole lot further (to Turgot, for example). Contracting demand doesnt mean the same at all - it means that demand shrivels away, the interest wasnt there anymore, people dieoff or get pissed off. In polite words, this is "secular change" or "attitudinal change".

1929 triggered the Long Depression or Great Depression. In plenty of countries (Russia for example, most African countries, most of South America) the Long Depression has been about 1986-2000. Through the 1990s things only got worse. And worse.

The 1929-36 sequence made World War 2 inevitable. The Mussolini campaign of 1936 in Abyssinia (Ethiopia) bears plenty of resemblance to the Bush-Blair Iraq war. That is hysterical, racist, instant imperialist, with absolutely no concrete economic bottom line. Mussolini got nothing out of Destroying the Desert Dictator (or Negus) of Abyssinia, and the Bush-Blair crowd are doing a great job in destroying Iraqi oil production and export capacities (so far, a reduction from about 2.6 Mbd exports, to about 0.25 Mbd). We still await the Hitler lookalike, today.

The meltdown of country after country in Africa through the 1980s and 1990s has led to a Pan African War that rumbles around a large part of the continent, every day. Asking those guys to pump Cheap Oil as well as massacre each other may be stretching things for infrastructure destroyed, very poor countries which have - deliberately - been subjected to 'austerity cure' , or Belsen Economics since the mid-1980s (politely called 'structural adjustment'. Try articles by Greg Palast)

The message of what will happen IF there is an October 03 Crash can be summarized by this old dicton/

NEVER REAWAKEN A SLEEPING DOG
(some nonWestern sayings use 'dragon' instead of dog)

Possible and likely impacts from an Oct 03 crash: One to three years on

Geopolitical and multipolar seismicity - those fault lines already so clear under the surface can open up and swallow the Old World (the 1945-2000 world that the GWB regime is trying, insanely, to save or prevent collapse of, rather than de-energize it, transit to sustainability, and stop striking poses on the cliff edge).

Visitors to dieoff.com dont need details on the Breakup of the Postwar Pangean World, this article is about mechanisms.

An Oct 03 Crash will aid the necessary, inevitable de-Globalization and Increased Multipolarity that will surely come within a decade because any classic bourse crash will first-and-most impact the First World of US-Europe-Japan- traditional NICs (South Korea, Taiwan, Singapore etc).

You can easily check that by energy intensity per capita. Take out all the high energy economies, measured by (say) more than 5 to 7 barrels/head/year. These are the only economies and societies where there is enough cash left around to play bourse casino, the 'What If' paper flutter with electronic chips. Other economies and societies dont have the spare dimes or time for that.

That means The Rest, and that rest accounts - already - for at least 50% of world GNP

An October 03 Crash would have little impact on The Rest. Its a classic of 'Liberation Economics' (eg. Samir Amin, Gunder Frank, I Wallerstein, etc), that is/ When the First World does badly, The Rest does well. In fact, the analytic base of this is 1930s and 1940s colonial struggle and emerging Cold War standoff between US/Europe/Japan and the 'traditional marxist block' - USSR and China - with a bunch of bystanders vaguely called the 3rd World (India, Indonesia, Pakistan, the Arab world, Africa, Latin America, and a few others). At the time, all these economies were below about $400/capita annual GNP in dollars of today. Their oil consumption was virtually zero. In economic terms, the Long Depression of the 1930s was very good news for plenty of the 3rd World. Not all but plenty.

This will be exactly the same again if an Oct 03 Crash happens and it is 1929-style, it will penetrate those outer shells, right through to the neutronic core, and economiccontraction will happen, that is not only 'demand destruction' but also elimination of needs for, desires of, and equipment, buildings and infrastructures used in so-called "gainful economic activity". In other words: a self-feeding or high gain feedback demand and supply contraction process. A very Long Depression could generate inside the OECD, former richworld.

There is almost no limit at all on the DOWNside, just like on the UPside! Cycles work really well in BOTH directions. Through 1929-36 there were 60%-90% contractions in "key business and activity indicators", in plenty of civilized world countries. Plenty of The Rest, that is countries that were soon going to 'detach' through decolonization, experienced steady if not spectacular economic growth right through 1929-39 and into World War 2.

China, India, Brazil, Pakistan, Iran, Turkey - to name some very key players - will have a Sink-or-Swim choice. Go down with the First World, or separate.

They will separate. They will get autarchic. They will keep their own, internal-domestic economies going through Keynes-type programs, probably with a hard military edge. They will trade between themselves. Likely, too, the traditional NICs will break ranks with the Fist World OECD doing its Long Depression remake, and save their own economies by rejigging their manufacturing base to needs and opportunities of the Alternative First World (China, India, Brazil, etc)

Cycle abort

Just as probable, this sequence shorts out. The Alternate First World will save the Old First World like it already did in the 1980s through setting a floor to how much the First World can destroy demand (at the world level). In other words/ No real contraction. This could lead on to 'economy and social restructuring', which must come if only because of Peak Oil, but is not the subject of this discussion.

The Neoliberal Homeland and heartlands - no splendid isolation

Back in the early 1980s, the Reagan-Thatcher duo set out to destroy anything and everything that even smelled of "inflation". Money had to be 'saved', pronto. So they naturally turned their beady eyes on destroying the economy. To their New Economics advisers 25% unemployment was a tiny price to pay for "stability" . People who still had a job, and even a few jobless fools flocked to vote for this hunky dory policy.

Despite that cute bit of Frankenstein Economics (also called Voodoo Economic at the time), and in lightning speed in the one year 1983-84 the world economy turned around and pulled out of a Long Depression entry sequence. No Long Depression happened. There were floors to the falls in First World economic activity. One hard and certain floor was the Alternative First World. It was bashing metal consumer products, and later on electrons, that the former Richworld had - temporarily - decided was a yucky thing to do, while its Consumer Citizenry piled back into personal consumption like it was going out of style - which it is! There is no question the Neoliberal Homeland and heartlands are more economically fragile, de-structured, and ripe for root-and-branch change than ever in their history. A major bourse crash in Oct 03, with real sequels in te real economy, to a backdrop of coming Peak Oil may - we can hope - sound the wake up call.

Bottom line to all this

It is unlikely a 1929-style crash can happen because there will not be a Long Depression after the October 2003 crash. I could be wrong! There is no 'theoretical need' for the OECD Richworld to not slide into permanent recession (0%-1% annual real GDP growth, falling to -1% to -2% per year) and stay there. This could be the run up, continue long enough to join up with Peak Oil, after which incipient global economic collapse could be realised. But I doubt this a lot.

HOW TO MEASURE

This brings us back to one measuring rod - fossil energy supply and consumption. Any economic crash sequence can be measured by world oil and energy demand. We could have low annual oil and gas demand growth, even slight falls as we get to 2010. Prices, however, will go UP as world demand hits against physical limits on supply, the previous and artificially low oil and energy prices having disenabled investment in energy transition (to a low energy economy and society) and slowed or prevented development of nonoil/nongas alternatives on a serious and committed base. On the question of 'Did dirt cheap oil and low fossil energy prices disenable investment in alternatives to fossil fuels?' anybody who wants can check what has happened to investment in nuclear power since the Oil Price Crash of 1986. How are construction trends for nuclear power plants over the last 15+ years? The industry is dying on its feet! There is no time left left to create the Nuclear Nirvana - which is perhaps the sole thing we can be really thankful about.

It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.

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