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'Time for a new recession'

Patrick L Young is expert in global financial markets working in multiple disciplines, ranging from trading independently to running exchanges.

Published time: April 14, 2014 11:50
Traders work on the floor of the New York Stock Exchange (Spencer Platt / Getty Images / AFP)

​The economic cycle is approaching its average upswing, but worryingly many Westerners have yet to encounter the green shoots of recovery.

The US economy bottomed out in June 2009. May 1 will mark the 59th month of expansion. The average upswing since 1945 has been 58.4 months. True, averages are, by their very definition somewhat middling, as their precision is perpetually open to negotiation. However the upswing’s days are clearly numbered – we’re just haggling over how many months it will be. Given the severity of the last recession, the rebound recovery will probably be slightly longer than average, but can it last for another 60 months to equal the longest post-war expansion? After all, that was during the 1960s, with heady optimism surrounding “the white heat of technology.” Likewise, the 1980s saw a lengthy expansion. However, President Reagan was pro-business, as opposed to the big government anti-enterprise Obama administration.

Let’s consider those two words between which we often experience a chasm in the real world: “hope” and “reality.” The hopey-changey one of 1600 Pennsylvania Avenue clearly clings to a certain blind faith in his divine right ability to enjoy economic growth as he dithers stylishly over most every decision. Likewise, many investors cling to the last swinging reed of optimism in any bull market as they are all “long,” hoping for a “greater fool” to drive the market further up. Ultimately, the music stops and the invisible hand of the market removes a few chairs before the cycle starts again. The reality is the band has played a full set and could become bored playing encores anytime soon, leaving the fat lady to belt out her final number.

The problem is growth hasn’t been remotely uniform in the West; for many it is still all but extinct.

Traders work at the stock exchange in Frankfurt am Main, western Germany (AFP Photo / Daniel Roland)

Thus far this narrative has focused on the US, but let’s switch to that endangered species: prosperous western Europe. Emboldened by years of state subsidized crypto-socialist interventionism, the biggest swing of 2007-09 was the arrival of the deluded government spending cavalry, who brazenly bailed out their bagmen and bankers. Despite this crypto-nuclear interventionist fervor, the EU economy (barring a few exceptions led by non-Euro Britain) is stubbornly flat-lining. Unemployment of 11.9 percent in the Eurozone remains a damning indictment of a failed supranational experiment. As the east grows, Europe is stagnating, thanks to dilettante dogma from Brussels.

Then again, the Federal Reserve has thrown the GDP of a small African nation into QE intervention every month for half a decade, implying that even America’s growth may not be sustainable without stimulus. US growth ought to be vigorous without the training wheels to keep the economic bicycle upright. Without the Fed buying bonds with alacrity, who knows where the United States would be? Thus the taper terrifies markets, while Europe is truly moribund. Herein lies the root of the problem. In the trough, western governments threw everything at economic rescue with a foolhardy bank bailout and a misguided diktat to protect decaying industry at the expense of innovation. Despite six years of US economic growth, Europe has shirked resolving its problems while the US has stored theirs up for the next rainy day. Welcome back to Kickcanistan.”

May 2014 could prove “as good as it gets” for the next few years, despite the Mediterranean already being mired in a hotbed of rampant unemployment. Moreover, those still clinging to the deluded interventionist tack which helped get us to this point cannot forget that western government sits at the outer limits of feasible borrowing (much of the EU is already uncomfortably beyond these limits). So, bad news for the interventionists: there is no socialist alternative – the post-war era has involved assiduously overspending for several generations. The only way out is from the bottom up... but that story will have to wait for another, sunnier day. First up, it’s probably best to strap in and await the end of this cycle... which could prove frightening.

A gentle tearing sound could soon give way to a thunderous roar as the firmament of Europe is ripped asunder long before the EU has rescued its citizens from an increasingly hopeless economic fate. Not only is the end of the economic cycle approaching, but with the government cookie jar empty, the west has never been worse prepared for the inevitable downturn.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

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