Five Years On, The Great Recession is Turning Into a Life Sentence

China is talking about trillions in stimulus to avoid a hard landing; the ECB is preparing to print as much as it takes to save Spain and Italy; markets are pricing in more printing by the Fed in the fall.

These three superpowers, acting together, can launch a mini-cycle of growth, but the twin headwinds of debt leveraging and excess manufacturing plant across the globe cannot be easily conjured away.

Some date the crisis to August 9, 2007, the day it became clear that Europe’s banks were drowning in US housing debt. Others say it began twelve days later when yields on 3-month US Treasury bills to crashed from 3.76% to 2.55% in just two hours, as investors pulled out of America’s $2.5 trillion money market industry in panic. The original trigger for the Great Recession—the housing bubble—has faded into insignificance.

Five years later, it is clear that subprime was merely the first bubble to pop, a symptom not a cause. Europe had its own troubles. Monetarists blame the ECB and the Fed for keeping money too tight in 2008, pushing a fragile credit system over the edge. Austrian School economists argue that a rise in debt ratios across the rich world from 167% of GDP to 314% in just 30 years was bound to end badly.

Today, the imbalances are slowly correcting. Wage inflation has eroded Asia’s competitiveness. China’s current account surplus has dropped from 10% of GDP in 2007 to around 2.5% this year.

Yet Europe refused to adjust. Germany is still running a surplus of 5.2%, down from 7.4% in 2007. The North has refused to offset the demand squeeze in Club Med. Indeed, Germany legislated its own internal squeeze through a balanced budget law and imposed this curse on the rest of the Eurozone.

America hasn’t even begun to purge its debt mountain; it cannot be done by austerity alone because the economic contraction would be self-defeating.
Much of the debt will have to be written off, either by inflation or by default

To read Ambrose Evans-Pritchard article: Five Years On, The Great Recession is Turning Into a Life Sentence

Tagged as: Austrian School, China, European Central Bank, Eurozone, Federal Reserve System, Germany, Late-2000s recession