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Consequences of a long, deep recession – part III

20 June 2008

Summary:  this series speculates about the consequences of a deep and long recession over the next few years.  How might we react?  How might this change America?  The first post examined our alternatives.  The second discussed possible changes in our financial system.  This chapter looks at the effect on Americans, and America.  Our next President will face these challenges, so your vote in November is important!  This series is an expanded version of my post of 12 February.

A more granular look at the political implications

What happens to the people unable — or unwilling — to pay their mortgages?  Political scientists, going back to Alexis de Tocqueville’s “Democracy in America, note that American values are determined by mass behavior. Divorce and abortions are bad, until lots of folks do them. Then they are considered empowering and life-affirming. The moral stigma of illegitimacy and bankruptcy have both largely faded away since the last severe recessions in 1973-75 and 1980-82.  Economists will find the resulting behavior change inexplicable and astonishing.  So will lenders.

Will the State sidewith creditors or lenders?  Will legislators favor voters in the 50 million American households with mortgage?  Or will they side with the malefactors of great wealth and Wall Street CEO’s?  Legislatures could sneer at these voters, then join the unemployed after the next election.

There are ample precedents in our history for legislative action favoring debtors.  For example, during the Great Depression several states (e.g., Minnesota) passed foreclosure moratoriums.  These are also appearing today, in various forms). 

There were also extra-legal community actions, in the long (and checkered) tradition of American vigilantism.  Most notable were the widespread “penny auctions” of farmers’ land and equipment at which his neighbors forcibly prevented competing bids.  See this description, along with its famous photo.  Strong communities find their own ways to cope.  That most financial institutions are national — not local — will make these measures even easier today (local institutions often having more local knowledge and legitimacy than national institutions).

Also remember that the Great Depression was generations ago, before the maturation of 4GW.  The techniques of 4GW make mass popular action easier and more effective.  The US civil rights and anti-Vietnam War protests are prime examples, but already ancient.  Collective action will appear much faster today, as our institutions’ legitimacy has greatly faded since the 1960′s.

Conclusions:  will these drastic measures work?

To answer this, first define “success.”  We can guess at the effects of these steps in this scenario:

1)  These measures will slow the decline, albeit with large scale and unpredictable side-effects.  This buys time for our economy’s natural healing mechanisms to work. 

2)  Nationalization of the health care and financial sectors (de facto or de jure) would expand the US government’s size and power. This would be a major change in US public policy change, a repudiation of the post-1980 dominance of private-sector solutions. I doubt health care and finance would be the only sectors affected.

3)  Any large-scale collective action by citizens would have unpredictable but perhaps large and long-lasting effects, esp. if rooted in strong institutions.

The steps forecast here are only illustrative in nature, the first phase in the end of the post-WWII economic and geopolitical regime.  These speculations help us see the range of futures that lie before us, and their consequences.  This is a harsh scenario, but even so it is not Armageddon.  One reason, perhaps, for the defiant optimism of people repeating the “Dude, where’s my recession” is fear.  We have had only two recessions in the past quarter-century — and those the two lightest recessions since WWII.

Recessions are part of the business cycle, part of life.  The economy must breath in and breath out.  They are painful, like so many things in life, but nothing to fear.  That is the most important conclusion of this analysis.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

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2 Comments leave one →
  1. Rune Kramer permalink
    20 June 2008 7:27 am

    There could be benefits from a recession in the form of a better balance of the US current account.

    A long period of low growth and high unemployment would force small & medium sized US companies to become export oriented in order to grow their businesses. It has simply been to easy to make money domestically.

    When the economy then changes for the better hopefully the focus on exports will remain part of the way US small & medium sized companies do business. Thereby solving some of the problems regarding the chronic trade deficit.
    .
    .
    Fabius Maximus replies: We can hope so. But past recessions have seen the trade and current accounts improve, only to slide into the red again during the following boom.

    My guess is that this downcycle will see something “break”, forcing policy changes that end the post-WWII regime. For example, rising inflation may force change in the emerging nations that use the Bretton Woods II “system.”

  2. jhunt permalink
    30 June 2008 1:56 am

    This is a reply to the post and FM’s reply to the previous comment.

    1. Great post FM. Great blog, and I only wish I had the time to go through and read them all, if only for the great learning opportunity it represents.
    2. I wonder about the ability of that trend to continue should we enter a ‘long and deep recession.’ Alot of our previous economic growth was credit based (appreciating home prices, home equity loans, credit cards, etc.). Any protracted recession would seriously effect the ability of the average consumer to leverage up. That said, I think that Washington and the ‘malefactors of great wealth’ will do whatever they can (including socializing their beloved ‘free markets’) to keep us out of said recession, to disastorous long-term effects.

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