L'Ombre de l'Olivier

The Shadow of the Olive Tree

being the maunderings of an Englishman on the Côte d'Azur

26 January 2009 Blog Home : January 2009 : Permalink

Some Great Depression Thoughts

I'm becoming more and more convinced that the Euro's current strength is unsustainable in the long or even medium term. It is, it seems to me, caused by sentiments like "it isn't as bad/unpredictable in Euroland" rather than any inate strength. When its strength causes sufficient pain that it can't be hidden it is likely to crack catastrophically as the weaker countries (Greece, Spain, Portugal, Ireland) are forced to take emergency steps to survive including a massive currency devaluation and probably some kind of effective default on their Euro denominated government debt.

Yesterday someone who I would not normally consider a financial genius, or even particularly financially knowledgeable said something along the lines of the following (I paraphrase):

"When the Japanese bubble burst they had 0% interest rates for 15 years before they got a recovery. Why should we assume that the same strategy is going to work any differently in the rest of the world this time around?"

I could add that the Japanese government also spent zillions on concrete (literally) public works and made all sorts of other attempts to get the economy back on track without much success. The bailouts proposed in Washington, London, Brussels etc. don't sound notably different except that the politically connected class that get the money are not, for the most part, construction companies.

So that's the bad news. And it could well get worse. Demand for things like steel has fallen off a cliff. Shipping rates are practically zero. The frivolous debt-driven excess consumerism has halted and that is not a good thing for the global economy unless we can find a way to replace that demand with something else.

However this is where the good news comes. The developed world can feed itself and, for the most part, provide itself with clothing and other basic necessities without much of a problem these days so we can afford to have some creative destruction. Of course we'll probably get a certain amount of non-creative destruction too because a whole bunch of assumptions regarding economic growth and taxes are going to have to be dumped and that adjustment is going to be painful. I wouldn't assume anyone under 50 will get a pension from any government for example.

But I also anticipate vastly increased use of the internet to disintermediate even more. If banks continue to not lend and not offer savers attractive rates we'll see alterntive sructures like saver cooperatives (mutual funds reborn if you like) which invest in viable businesses that the members trust. We'll likely see shop rents collapse as more and more shopping moves on line. Food will mostly still be bought in (super)markets but music, movies, games, books, gadgets, lots of clothes, jewelry and even things like building supplies are likely to be made available on-line for less. The high street is going to look rather different once all this has gone away, as may the out of town shopping malls. If owners of commercial property don't cut rents to retailers they'll simply see lots of empty sections. Even if they do cut rents this will mean an end to new commercial retail developments. The ROI will be MUCH worse than it was and the developers just won't be able to find investors who are willing to accept the returns.

Its going to be interesting for the next few years in very much the "Chinese curse" sense