Why the bitter pill of recession can be a tonic for economies
Investors have been looking for safe havens to park their cash after figures earlier this week pointed to a dangerous slowdown in the US economy at a time when Europe's debt problems appear to be engulfing big economies like Italy and Spain.
SCMP, August 5
I don't say I like recessions. They threaten your job, they cut back your income, they make the boss irritable, they make your work stressful and generally I'm like everyone else about them - let's get this over with.
But I do recognise that recessions are essential to economic progress. They are where you pull yourself up short and say to yourself: 'Hmmm..., that didn't work too well. Maybe we ought to do things a bit different on this project or look at something entirely new. Let's try ...'
This is not something you tell yourself in boom times. When everything is rolling along gloriously your strategy is the pedal-to-the-metal one: 'Let's just keep doing what we're doing except do more of it.'
Recession is where an economy makes the change to new directions, where the losers are winnowed out and room made for the winners, where the big mistakes of the last boom are revealed and new ideas are given a chance to prove themselves in the next boom. One of the better examples I know of is Hong Kong's in the 1998 recession.
As the first chart shows, it was then that, without any conscious government decision, we relaunched ourselves fully as a services economy. It was a huge transition and it was made in recession. But recession is bitter medicine all the same and sometimes politicians refuse to take it. To keep the old boom going they issue mountains of debt to prop up both failing industries and the financiers who backed them.
A good example is the United States in the 2008 recession. The second chart shows you the price of these efforts. In the space of just three years federal debt rose by US$5 trillion, going from 65 to 95 per cent of gross domestic product.
And what did the US government get for this huge expenditure?
On Thursday, the Dow Jones Industrial Average crashed by 512 points, or 4.3 per cent.
The big bail-out has not worked. American industry faces its old problems again, but worse now because the government staved off recession and change has been delayed for three years. Old Rustbelt America wouldn't go to school. It skipped class again.
You may say, of course, that there was no alternative, that if nature had been left to take its course, the banks would have gone down one by one, the financial system would have failed and America now would be in deep depression.
I'm not so sure. I have a lot of faith in the resilience of any financial system left to take care of itself. The recession would undoubtedly have been deeper with some spectacular corporate failures and many people would have lost a proportion of their savings in the banking system.
But the US would not have been removed from the map of the world. A leaner, fitter, economy would soon have reasserted itself again.
In fact, I think the risk of a big depression has been made greater by the refusal to take the full hit of the last recession on the nose.
And if not depression, the US can now look forward to a Japan style 20-year do-nothing performance.
How glad I am to live in Hong Kong. Don't you make that big mistake too, Donald.