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Work and prosperity
27 August 2012

Unhappy anniversary: the first five years of the permanent recession

Earlier this month, Ambrose Evans-Pritchard, international business editor of the Daily Telegraph, marked a sombre anniversary – the first five years of the ongoing global economic crisis:

  • "Some date the crisis to August 9 2007, the day it became clear that Europe’s banks were up to their necks in US housing debt. The ECB flooded markets with €95bn of liquidity. It seemed a lot of money then. The term ‘trillion’ was still banned by the Telegraph style book in those innocent days. We have since learned to swing with the modern dance music from central banks."   

As complacent economic assumptions unravelled around the world, Gordon Brown and his ministers continually reminded British voters that the crisis had "started in America" – as if the Labour Government were no more culpable than for the outbreak of some nasty foreign disease.

However, as Evans-Pritchard explains, the crisis did not start in America, it started just about everywhere: 

  • "Five years on it is clear that subprime was merely the first bubble to pop, a symptom not a cause. Europe had its own parallel follies. Britons were extracting almost 5pc of GDP each year in home equity by the end. Spain built 800,000 homes in 2007 for a market of 250,000. Iceland ran amok, so did Latvia and Hungary. The credit debacle was global. If there was an epicentre, it was Europe’s €35 trillion banking nexus."   

For all the arguments that are made about the economic rationality of public and private debt, the credit crunch proved once and for all that you can have too much of a good thing: 

  • "…the ‘Austrian School’ is surely right… to argue that a rise in debt ratios across the rich world from 167pc of GDP to 314pc in just thirty years was bound to end badly. There comes a point when extra debt draws down prosperity from the future. The future arrived in 2008.
  • "Creditors and debtors may in theory offset each other, but what actually happens in a crunch is that borrowers cut back feverishly. Creditors do not offset the effect. The whole system spins downwards. It is debt’s fatal "asymmetry", long overlooked by New Keynesian orthodoxy."   

Moreover, the global economy continues to stagger from crisis to crisis, because the burden of debt has yet to be lifted: 

  • "As for our debt mountain, we have barely begun the great purge. Michala Marcussen from Societe Generale says the healthy level is around 200pc of GDP for advanced economies. If so, we have 100 points to cut."   

But, how? If the overhang of debt is so vast, what can we do to get rid of it? Evans-Pritchard lines up the unpleasant alternatives: 

  • "This cannot be achieved by austerity alone because economic contraction would tip us all into a Grecian vortex. Such a cure is self-defeating. 
  • "Much of the debt will have to be written off. Whether this done by inflation (1945-1952) or default (1930-1934) will be the great political battle of this decade. Pick your side. Pick your history."  

Choose your poison, more like.


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