This is the end, beautiful friend. This is the end, my only friend, the end. Of our elaborate plans, the end. Of everything that stands, the end. No safety or surprise, the end. I’ll never look into your eyes, again. So begins Jim Morrison’s classic Oedipul poem, The End. This song was released in January of 1967. At that time, the US Economy had been growing for 6 years, and was just about two years away from the mild recession that began in December of 1969. This eight year period was about the average length of an economic cycle in the US – just as it is today.
Last week, the Bureau of Economic Analysis (BEA) of the US Commerce Department issued its revised first quarter GDP numbers, and in spite of what the Keynesians are saying it looks as if the economy did indeed decline in the first quarter – though by a mild -0.2 percent. Economies can have periods of sluggishness, and the first quarter has generally been the weakest in recent years. That said, the last recession began in the winter of 2007, which is now about 7 years ago. In spite of the weakness of the current recovery (in real terms the economy today is just 8.6 percent larger than it was prior to the start of the last recession in December 2007), the economy has experienced a normal business cycle. This suggests that the start of the next recession is not far off.
In its June 13, 2005 issue The Economist magazine published a survey on the coming recession and how the world economy is unprepared. According to The Economist it is finally time to declare the battle against the 2008 recession won, and for the first time since 2007, nearly every advanced economy is likely to actually grow in 2015. But while they are all growing, economies throughout the world are incredibly fragile – particularly in Europe and Japan. The Economist goes on to suggest that it would not take much of a crisis to send the world back into recession, a recession that it is ill prepared to cope with.
The Economist cited a number of orthodox Keynesian concerns, including a lack of borrowing capacity, and historically low interest rates, mean that traditional monetary and fiscal policies cannot be counted on as a bulwark against the next recession. This is correct. World economies are overleveraged, and even more so after the massive debt buildup that was used to quell the last recession. But debt and inflation are not growth, which is exactly the lesson of the 2007 financial crisis. The recession occurred because so much economic activity was geared toward issuing debt and consumption rather than toward making economies more productive. In the end recessions are rally about fixing imbalances in the economy. This is what the economist Joseph Schumpeter called creative destruction, and while the orthodox economists are correct that demand imbalances can make recessions worse, they are not the cause.
In fact, the seeds of the next recession are evident. Over the past 7 years the pace of new business growth has been abysmal, and investment in private plant and equipment (outside of housing and offices) as well as public infrastructure has been lacking. Rather, cheap money has been spent by firms buying back stock, and growing cash surpluses, and by government subsidizing sloth. The current anti-business regulatory environment has encouraged this as the risk involved in organizing new ventures makes them unprofitable when compared to financial investments. All of this means that productivity growth has remained low throughout this business cycle, and there is not a lot in the hopper to help it continue along past its natural 8 or 9 year life span.
As Jim Morrison said in 1967, no safety or surprise, the end. The next recession will not be a surprise. In fact, like The End suggests, the killer of the most recent economic cycle has already awaken and put his boots on. The only question is when will he Walk on Down the Hall.