How can the economy pick up again ?

[Sucre]

If you read the reports from various countries, this is a question really worth asking.

The economic crisis is global, not regional, the US is at its deepest (worse the Americans are pessimistic) some countries have already collapsed, like Iceland, other are on the verge of collapsing like Ireland, the Ukraine, Hungary, exports driven countries cannot count on exports anymore, like Germany and China, but consumption at home is low, in industrialised countries because wages have been stagnating for the last 15 years, in emerging countries because wages were low anyway, salaries continue to drop and people everywhere are losing their job, many industries are losing badly, not only the banks, last but not least, the State is creating the next bubble.

Under such circumstances, my innocent question here : how can the economy pick up again, that it at least stops plunging. Where can it start ?

[Michael]

If you read the reports from various countries, this is a question really worth asking.

The economic crisis is global, not regional, the US is at its deepest (worse the Americans are pessimistic) some countries have already collapsed, like Iceland, other are on the verge of collapsing like Ireland, the Ukraine, Hungary, exports driven countries cannot count on exports anymore, like Germany and China, but consumption at home is low, in industrialised countries because wages have been stagnating for the last 15 years, in emerging countries because wages were low anyway, salaries continue to drop and people everywhere are losing their job, many industries are losing badly, not only the banks, last but not least, the State is creating the next bubble.

Under such circumstances, my innocent question here : how can the economy pick up again, that it at least stops plunging. Where can it start ?

Those are very good questions!

To answer the question, one has to understand what is actually happening out there (and that's bloody difficult since there is so much happening).

First of all, recessions are a natural part of the economic cycle. In boom times, companies (and individuals) always seem to believe that the growth phase will never end and keep investing, trying to ride the upswing. As a result, they always overshoot - and invest too much. This creates too many assets, too many jobs, too much capacity that is not supported by sufficient economic activity. The result is a recession (which is where we are at).

Essentially, housing is the key sector that has been 'over-invested' in this particular cycle. That means that a lot of the houses built over the last couple of years (mostly, but not entirely in the USA, UK, Spain, Ireland, etc.) are 'surplus' and there is no actual demand to buy them at this time. Please note that the same is true for all categories of building construction (commercial, industrial, residential) - residential housing just happens to be the largest and the most profitable form of building construction and thus the one most prone to the 'over-investment' problem. The 1990-91 recession (for example) was caused by over-investment in commercial office space rather than houses.

Having such a large supply of empty housing units tends to 'flood' the supply chain, which in turn, causes an average fall in prices (law of supply and demand). Prices will continue to fall until they reach a level that will spur people to start buying up these 'surplus' houses. Until that time, housing prices will continue to fall - and that means the price of financial securities based on the housing sector (i.e. mortgages, which constitute the majority of financial products) will also have falling prices. And that means the banking-finance sector that is the holder of the majority of these financial products will continue to suffer from these same falling prices.

Of course, all those people who get laid off from all these collapsing housing construction companies and mortgage finance companies (and car companies) stop spending their money and that causes a drop in overall consumer demand for other products and services. The fall in sales of these other products and services tends to cause these companies to reduce their production capacity (meaning they layoff some workers) and that just feeds the cycle of laid off workers reducing their spending, making it all worse for everyone.

The way this process naturally ends is twofold. On the one hand, eventually, normal population growth over time will produce 'new' demand to the system and that increase in demand will help to reduce the stock of over-supply of houses and as that goes down, then there will be demand for constructing new houses so that the construction companies will hire workers again and start buying construction materials again and the economy stops shrinking and starts to grow again (and likely will make up the lost ground within a year or two, depending on how severe and how long the downturn).

On the other hand, much of the economy is still going on - still producing, still selling and still issuing paychecks to workers. These companies tend to delay investments and purchases during a downturn - rationally preparing for hard-times by increasing their cash supply. If they are lucky and/or well managed companies, they will have a pent-up demand for new investment. They will hold off while times look bad, but with investment prices very low due to the recession, this time becomes attractive for these well managed companies that do have the capital on hand to expand their operations. They will watch the markets closely and when they think things have hit bottom and will start to rise, they will start to invest to take advantage of the low prices of investment goods (building costs are very low right now, machinery is also cheaper with manufacturers offering discounts to move the product) and they will 'kick-start' the business investment cycle going again.

On this basis, the countries that have the fastest growing populations (and/or the ones with the youngest demographic profile and/or the ones with the most immigrants) and/or those countries with the most dynamic business environment will likely recover first. That means the USA, while the recession will likely lag on in Europe and Japan (since they have older demographics and slower investment cycles). As one country rises out of recession, this reverses the downward dynamic and starts to increase demand for exports from supplier countries and that helps them start growing again. In other words, a recovery in the USA will likely be 'exported' to Canada and China first, since that's where lots of US imports come from.

That's the basic explanation of the process of 'recovering' from a 'US-centered' recession.

Unfortunately, things are a bit more complicated this time around since the US economy has some deep structural problems that need to be worked out. As noted above, it is the US economy that is the one that will recover first - so their recovery is VERY important to everyone else's (due to our over-connected global economy). See next post.

[Michael]

As noted in my previous post, the US economy is in a recession right now. It is a particularly deep and nasty recession - deeper and nastier than any recession before it going all the way back to the Great Depression of the 1930s. The reason for this is the US economy is having to adjust to some 'deep structural' issues that got out of hand during the last fifteen years or so - specifically, the US household savings rate and the US balance of payments deficit. These two are actually related to each other, but I'll spare you an explanation of that! ;)

To make a long story short, the average US household savings rate has traditionally been fairly small for a long time. It was marginal but positive throughout most of the 1970s and 1980s. It started dropping through the 1990s and actually has been running negative for the last half-dozen years. On paper, this means that the average American consumer has been spending roughly 106% of their annual income each year for the last half-dozen years (I could explain how that works, but its tedious, so I'm going to skip it here).

As a result, many producers of goods and services have expanded to meet this level of demand. Thus, the US economy has grown accustomed to this level of spending. One 'effect' of this recession has been to 'shock' the US consumer spending so that the US household savings rate has actually recovered (starting last summer) and this means the American consumer is now only spending roughly 97% of their annual income. That's a big drop in spending on goods & services. And it is 'totally gone' and will not recover (or it better not!). The upshot is that this drop in consumer spending is enough - all by itself - to cause a US recession. Throw in the normal recession from the business cycle and you get a really nasty recession that may hit 'depression' numbers.

The good news is that the US household savings rate is positive now and the US current accounts deficit has been cut in half (or more) over the last six months. This is really, really good news since it signals that US economic fundamentals are returning to normal. The bad news is that this causes a recession for most of the planet.

The bottom line here is that a 'normal' recession from the business cycle in the USA has been made much more severe due to the structural shift in the US domestic savings rate. This means a recession that is much longer and more painful than previous recessions. And a long and deep recession in the USA is bad news for the rest of the planet since it is only the USA that is large enough and has the dynamic investment economy to be able to actually climb back out of this recession (and subsequently start the chain reaction that will spur other economies out of their recessions).

[Sucre]

Economy will pick but at a much lower level, once the values have retunred to the values of the "real" economy.

You mention US growth in population - but this can only help if there is miney to give out. Population growth does no necessarily support economic growth - on the contrary, this young population is a cost factor in term, at least, of education and health. (Look at Africa ...)

[Michael]

Economy will pick but at a much lower level, once the values have retunred to the values of the "real" economy.
There is no intrinsic value to any number value - thus, there is no "real" economy numbers to return to. All economic numbers are a product of the market. The numbers are what the numbers are on any given day. No number is the 'right' number.

The economy will pick up eventually and will return (and surpass) the highest numbers from before the crash.

I've only suggested that this process might take a bit longer than normal - due to the uphill climb for the US economy due the more rational savings rate.

You mention US growth in population - but this can only help if there is miney to give out. Population growth does no necessarily support economic growth - on the contrary, this young population is a cost factor in term, at least, of education and health. (Look at Africa ...)
Adding population in Africa makes everyone poorer because people in Africa are most often just 'cost-centers' (they eat) without being 'producers' (GDP/capita is the same as consumption/capita in many places in Africa).

Adding population in USA (via immigration) makes everyone richer because people in the USA are 'productive' and that far outweighs their costs. Besides, just having babies spurs huge amount of economic activity (buying baby carriages/trams, cribs, baby clothes, etc.).

Fact is, population growth is a steady source of GDP growth (usually about 0.5 to 1.0 % per year).

Politicians and business people rarely ever mention this because they prefer to take credit for the growing economy, rather than observe that the economy is capable of growing all by itself.

On average, an economy has to grow by 2.5% per year just to stay even (due to population growth and inflation). Few people mention this.

[Sucre]

The US population is productive of what ?

The present economy was/ is based on comsumption of goods & services - it accounts for 70% of the growth in the last years. The only production in the US worth mentioning is IT.

So what's left ?

[Michael]

Doesn't matter 'productive of what'. Production is production. US has the highest percentage of employment. Employment pays wages and that's GDP.

Even working under the table generates GDP activity (since wages get spent on food, shelter, goods & services).

[Sucre]

Doesn't matter 'productive of what'. Production is production.
This is precisely what I am questionning. It does matter production of "what" ... As we have now experienced the production of financial services means nothing if they do not ground on real economic stuff (like computers, cars, agricultural products etc.). They evaporated in a few seconds.

The production of services is also a very weak economic basis : to a certain (large) extent only the re-cycling of money produced at some other place. Services makes money circulate but do not produce solid value like industrial stuff.

US has the highest percentage of employment. Employment pays wages and that's GDP.
Sure, but unemployment is catching up very rapidly at the moment. It was the wages - and the comsuption - of these people which were supporting the US economy. What will all these people do now ? Who will pay them wages ? To do what ? To produce what ? This brings us back, unfortunately, to my initial question - where will the economy pick up.

[Sucre]

To clarify.

I understand everything you say and in fact agree with it. However, there is a contradiction that may not be apparent to you.

The "past" economic machine was fulled by American consumers and by consumption in general (i.e short live products, low savings v. high comsumption rate, the culture of credit cards).

The rest of the world was/is the producers living from their American client. This is true for such countries as China or Korea with relatively low incomes but this is true for Europe or Japan too, which, with their high living standards, have had a sound tradition of saving [eventhough it has pretty much erroded in the last 30 years] and an aging population.

However, a large part of American comsumption was based on credit not on real economic wealth, on existing value. The Americans were living above their means and, so to say, spending the money of their children. Added to this, the American economy has not been producing value anymore but consuming value produced abroad.

The bubble has now burst, thousands of households are bankrupt in the US, the world economy is crashing.

Considering that over-comsuption coupled with under-production at home has led to the present disaster, I wonder how the cause of the problem may be its solution as well.

[Michael]

To clarify.

I understand everything you say and in fact agree with it. However, there is a contradiction that may not be apparent to you.

The "past" economic machine was fulled by American consumers and by consumption in general (i.e short live products, low savings v. high comsumption rate, the culture of credit cards).

The rest of the world was/is the producers living from their American client. This is true for such countries as China or Korea with relatively low incomes but this is true for Europe or Japan too, which, with their high living standards, have had a sound tradition of saving [eventhough it has pretty much erroded in the last 30 years] and an aging population.

However, a large part of American comsumption was based on credit not on real economic wealth, on existing value. The Americans were living above their means and, so to say, spending the money of their children. Added to this, the American economy has not been producing value anymore but consuming value produced abroad.

The bubble has now burst, thousands of households are bankrupt in the US, the world economy is crashing.

Considering that over-comsuption coupled with under-production at home has led to the present disaster, I wonder how the cause of the problem may be its solution as well.
That's precisely why this recession is so large and likely to be a long one.

In the past two recessions, the US economy has recovered very quickly and posted strong growth in the year immediately after the recession. That's not likely to happen this time.

So my description of how the economy will recover is exactly the same. It will be led by consumer spending and residential construction in the USA. Because those two are particularly hard hit in the USA, that means a long and deep recession for the whole planet because they are going to take a while to recover and bounce back.

[Americano]

That's precisely why this recession is so large and likely to be a long one.

In the past two recessions, the US economy has recovered very quickly and posted strong growth in the year immediately after the recession. That's not likely to happen this time.

So my description of how the economy will recover is exactly the same. It will be led by consumer spending and residential construction in the USA. Because those two are particularly hard hit in the USA, that means a long and deep recession for the whole planet because they are going to take a while to recover and bounce back.

Do you feel China now has the opportunity to fulfill its goal of internal consumption offsetting an acceptable level of export production?

[Michael]

Do you feel China now has the opportunity to fulfill its goal of internal consumption offsetting an acceptable level of export production?
I think so. But that won't make much of a difference to the world economy situation as an increase in domestic spending in China will most likey benefit Chinese businesses since China isn't much of a luxury import market.

Btw, they've boosted defense spending by 15% for next year...

Not much anyone can really do here except put bandaids on the gapping holes and batten the hatches to wait out the storm.

Biggest danger is of course exactly what the US authorities are doing - misdiagnosing the problem. Apparently egos on Wall Street require that the US authorities misdiagnose the problem. Misdiagnose of the problem leads to the wrong policies being adopted. This is the deadly Japan-syndrome and the US is up to its eyeballs in following it to the letter. Same results as in Japan so far.

Btw, I've seen the first indications of the predicted recovery now being pushed off to 2011 now...

[Americano]

I think so. But that won't make much of a difference to the world economy situation as an increase in domestic spending in China will most likey benefit Chinese businesses since China isn't much of a luxury import market.

More BMW 7 series are sold in China than Germany, so there is a luxury market.

Btw, they've boosted defense spending by 15% for next year...


I consider that as much of an economic stimulus as anything else.

Not much anyone can really do here except put bandaids on the gapping holes and batten the hatches to wait out the storm.

Agreed, but we (US) seem to be uncovering the hatches rather than battening them down. If the currency survives I'll be surprised.

Biggest danger is of course exactly what the US authorities are doing - misdiagnosing the problem. Apparently egos on Wall Street require that the US authorities misdiagnose the problem. Misdiagnose of the problem leads to the wrong policies being adopted. This is the deadly Japan-syndrome and the US is up to its eyeballs in following it to the letter. Same results as in Japan so far.

Btw, I've seen the first indications of the predicted recovery now being pushed off to 2011 now...

That's (other than Helicopter Ben's imbecilic ravings) what I'm reading. Since US interest only home mortgage conversions to fully amortized peak in 2010/11 (with much higher payments) even 2011 may be optimistic.

[Michael]

More BMW 7 series are sold in China than Germany, so there is a luxury market.
Well of course. The Germans aren't silly enough to pay top dollar for a 2nd rate luxury car (even though the BMW price point is lower in Europe). Its a premium status symbol is what it is since BMW's traditionally fare quite poorly in comparative rankings (usually coming 5th out of 5 for quality/performance - but 1st in price point).

That's normally an exclusively American game - no surprise that it shows up in Japan & China. ;)

I consider that as much of an economic stimulus as anything else.
In China, yes. In USA, not so much.

Increasing the US defense budget doesn't usually increase employment levels.

Agreed, but we (US) seem to be uncovering the hatches rather than battening them down. If the currency survives I'll be surprised.
Yes, the resiliancy of the USD and the demand for Treasuries is remarkable - but unlikely to last forever.

That's (other than Helicopter Ben's imbecilic ravings) what I'm reading. Since US interest only home mortgage conversions to fully amortized peak in 2010/11 (with much higher payments) even 2011 may be optimistic.
I just can't see anything good coming from a failure to deal with the corruption of Wall Street. Zombie banks are deadly the way they can uselessly tie up huge piles of capital for years in entirely unproductive ways.

[Sucre]

Interestingly, you both bet on COMSUMPTION to boost the economy.

European economies thrived and boomed for several centuries until the beginning of the 20th century and the destructive two WW on an economy based on innovation - added value to a product - not consumption. (Re-read Marx)

I believe -and this is almost ideological - that the present disaster is based on an consumtion based growth - which accelarates the circulation of money but does not generate value.

And sorry for my bad English. Most of my readings on the subject are in French or in English so that I have problems translating.

[Michael]

Interestingly, you both bet on COMSUMPTION to boost the economy.

European economies thrived and boomed for several centuries until the beginning of the 20th century and the destructive two WW on an economy based on innovation - added value to a product - not consumption.
In the hundred years between 1830 and 1930, do you know how many MILLIONS of Europeans emmigrated to North America due to the horrific living standards in place in Europe at that time?

Do you realize what cost these peasants paid and the horrible 3rd class steerage passage they paid for? Why would so many millions do something like that unless their lives and eco-social prospects in Europe were particularly bleak?

I think a quick review of the economic-political conditions in Europe throughout the 19th century explains entirely the massive population growth in the USA and Canada at that time. Indeed, this is the reason that the US & Canada managed to have a population almost equal to that of Europe.

The most powerful democratic vote of all is the one people make with their feet.

(Re-read Marx)
:rolleyes:

I think one of the reasons that Marx failed to properly understand the full nature of capital was that he had such a European outlook on it. He apparently took European socio-political conditions as being a logical product of capitalism, when in fact, other models of capitalism were more advanced elsewhere - and many European socio-political regimes still had many pre-modern feudal elements reigning strong within them (which reinforces Marx's inclination to deduce a conspiracy between capital and aristocracy).

Marx paid only lip service to the fact that American capitalism was already far advanced over European norms (mostly due to politics - and blatantly stealing British patents) at this time. Marx acknowledged this in theory, but tended to ignore the fact in practice (reverting back to a slightly less developed - or more corrupt - model of capitalism in Europe in order to draw or support his conclusions). USA was using almost complete laissez-faire capitalism at that time, while England was always caught halfway between that and the traditional principles of mercantilism that had long ruled the continent. There has never been any mercantilism in the USA - it has always been the complete opposite of that in actuality.

I believe -and this is almost ideological - that the present disaster is based on an consumtion based growth - which accelarates the circulation of money but does not generate value.

And sorry for my bad English. Most of my readings on the subject are in French or in English so that I have problems translating.
I'll certainly grant allowances for linguistic issues certainly, but your statement about consumption here just doesn't make any sense at all.

Marx defines production and consumption as the defining elements of all (modern) human existence. "Man is a productive animal" is the key phrase Marx invokes. Food growing humans are held to be unique as the only creature that produces their own food-supply. This defines us as a species more than anything else. According to Marx, all human social
relationships are thus a result or a consequence of this basic fact.

To illustrate this key point, even isolated (pre-modern) hunter-gathering New Guinea highland tribes are consumers (they consume food, clothing, shelter, etc). The majority of efforts of the tribe will be devoted the production/collection/distribution and consumption of food, clothing and shelter. All animals require consumption to survive. Food is the most basic of all commodities.

This has always been the basis or foundation of Marx's philosophy and the reason that Marx is usually held in respect by academic philosophy, sociology and anthropology departments (despite widespread ignorance of Marx outside of this context). *My general statement here really only applies to universities in English speaking countries.

Sidenote: the strong presence of Marx in English Literature departments at such schools has always baffled me. :ummm:

[Michael]

Interestingly, you both bet on COMSUMPTION to boost the economy.
Yes, absolutely. Consumption of goods and services accounts for between two-thirds and three-quarters of all economic activity (excluding only 'interest payments' and investment spending on hard-goods and durables).

It is precisely here that the economic 'recession' is actually hitting - consumption levels are contracting, leading to production/service levels being reduced (which means layoffs).

The bank-financial crisis is a secondary or separate issue that is happening independently of a cyclical recession in the business cycle (though triggered by it). It is very serious, but for the most part, has only resulted in a few thousand job losses in financial companies, a couple of mid-range bank failures and a frozen credit market for massively debt-addicted countries and corporations (and their banker-enablers). Lots of sweating going on here, but not much damage so far (except to the Treasury departments and long term public debt positions in USA, UK, Iceland and Ireland).

The business cycle recession is the thing that puts people out of work and causes unemployment numbers to climb (and government tax revenues to drop). And business cycle recoveries are usually led by residential consumption-based growth.

For example, even though unemployment figures have jumped quickly, some 90% of those with jobs still have them. These people, in many cases, voluntarily reduce their own consumption during a recession - just in case. After a while, they will regain their confidence in their jobs or the economy and these people will start spending again - often with pent up demand for products they wanted and put off buying because of the recession. This is the real 'kick-start' that gets the growth cycle going again.

That is to say, consumer-residential spending is always a leading indicator of economic activity. Business confidence levels (or corporate investments) are always a trailing indicator of economic activity.

[Sucre]

In the hundred years between 1830 and 1930, do you know how many MILLIONS of Europeans emmigrated to North America due to the horrific living standards in place in Europe at that time?

Do you realize what cost these peasants paid and the horrible 3rd class steerage passage they paid for? Why would so many millions do something like that unless their lives and eco-social prospects in Europe were particularly bleak?

I think a quick review of the economic-political conditions in Europe throughout the 19th century explains entirely the massive population growth in the USA and Canada at that time. Indeed, this is the reason that the US & Canada managed to have a population almost equal to that of Europe.

The most powerful democratic vote of all is the one people make with their feet.
For tonight I only have time to answer this post.

To assert that the Europeans emigrated to the USA between 1830 and 1930 because of bad economy in Europe but attracted by the opportunities of American capitalism is a complete distortion of historical facts.

You must know that the UK was all throughout the 19th century the powerhouse of Europe and Europe the powerhouse of the world - and that Europe had the highest living standard in the world. The US did not catch up with Europe before the beginning of the 20th century and only definitely after Europe's suicidal destructions in WWI.

The reasons for immigration were twofold :

1) The wealth generated by the innovations brought about by the Industrial Revolution was not well distributed. The bourgeoisie was prosperous but the landless farmers leaving the country to the industrial plants for work lived in miserable condition.

This is why Karl Marx wrote "Der Kapital" and this is why Der Kapital and all the socialist movements became so popular : because they held true.

Don't scratch your head, Marx may still hold true today which would explain the strong presence of Marx in English Literature departments .
In a way, the situation was the same as it is today, only that today the economy is globalised so that wealth distribution is between nations and not within the nation.

2) The good economic performance in Europe was partly at the origin of an explosive population growth. The countries which "exported" populations to the US are also those where population surged : the UK, Italy, Germany were emigration countries.

France on the other hand was not an emigration country but an immigration country throughout the 19th century and until WWII. Why ? Because Belgians, Polish or other Eastern European populations were attracted by it wealth and its Republican constitution ? "The most powerful democratic vote of all is the one people make with their feet." ;) As much as I'd like to say Yes :), the answer is No. Simply, because the French population had been stagnating if not decreasing since the 18th century so there was room for others.

The US was a virgin country with plenty of land. Quite clear that it was the choice N° 1 for emigration.

[Michael]

To assert that the Europeans emigrated to the USA between 1830 and 1930 because of bad economy in Europe but attracted by the opportunities of American capitalism is a complete distortion of historical facts.
I didn't assert that American capitalism was attracting anyone at that time (that's more of an early 20th century thing).

I asserted that horrific conditions in 19th century Europe was the real reason so many millions emmigrated.

This was to counter your assertion that 19th century Europe was some kind of economic paradise - I think it was a hellhole at that time.

Dickens provides an excellent portrait of 19th century industrial England. No surprise that people were leaving by the millions.

1) The wealth generated by the innovations brought about by the Industrial Revolution was not well distributed. The bourgeoisie was prosperous but the landless farmers leaving the country to the industrial plants for work lived in miserable condition.
And given that the farmers made up some 75-85% of the population at the time, the VAST MAJORITY of Europeans were not prospering in the 19th century.

This is why Karl Marx wrote "Der Kapital" and this is why Der Kapital and all the socialist movements became so popular : because they held true.
The political structures of 19th century Europe owed more to tradtional aristocratic rule than they did to actual capitalist rule.

I've always held that was a significant 'error' of interpretation that Marx made - he took the political structure of early 19th century Europe and assumed that it was the natural consequence of the development of capitalism - it wasn't. It was the natural consequence of a 1000 years of aristocratic rule in Europe seeking to accomodate capitalism. Only the USA had actual bourgeois/capitalist government at that time.

And socialist movements were a direct result of the hideous conditions of early industrial production. Marx had nothing to do with that - if anything, Marx sought to have his theory 'piggy-back' on the socialist movements (which is why the concept of communism and socialism are so confused - Marx is the cause of that).

Don't scratch your head, Marx may still hold true today which would explain the strong presence of Marx in English Literature departments .
In a way, the situation was the same as it is today, only that today the economy is globalised so that wealth distribution is between nations and not within the nation.
Statistically speaking, most wealth transfers over the last three decades have been from the middle class to the rich - within any given nation. Check your data on this.

If anything, quite a few 3rd world countries have successfully transfered vast amounts of wealth from the 1st world to the 3rd world. China, India, Indonesia, Malaysia and the whole of the oil-producing nations all fit this category. All of these nations have significantly increased their relative wealth standing over the last three decades.

Ergo, your point doesn't hold up to scrutiny here.

2) The good economic performance in Europe was partly at the origin of an explosive population growth. The countries which "exported" populations to the US are also those where population surged : the UK, Italy, Germany were emigration countries.
High population growth never correlates with high econmic growth. Indeed, they usually run counter to each other.

High population growth correlates with a falling average wage/income level (which represents a fall in the average standard of living). This is exactly the case in Europe through the 19th century. Growing populations with falling standards of living. Thus, the impetus for emmigration.

France was (as you noted) somewhat of an exception to this pattern, but this was primarily due to the fact that France was very slow to industrialize. Thus, France didn't experience high growth in industry or population at that time. France was essentially stagnant (economically) through the 19th century (marking France's fall from being the largest economy & military in the world in the 18th century to a middle-rank power by the end of the 19th). Most of this was political it seems - French laws prevented capitalist enterprises from flourishing at that time (many leftovers from Louis XIV's industrial policy which was pure mercantilism).

The US was a virgin country with plenty of land. Quite clear that it was the choice N° 1 for emigration.
Yes, it was the first choice, but it was a tough choice and wasn't an easy life. The hardships of settlement in a barren land with hostile natives and thousand mile journies, backbreaking efforts to clear the land for farming and all that. Fact is, it took some real ugly conditions in Europe to make option this look even remotely attractive.

[Michael]

Btw, the general prediction that one sees floated around of US economy returning to growth in 2010 is entirely based on the 'normal' demand for cars and houses compared to the present 'below-rate' production rate for these products.

According to simple calculations, there will be a housing and car shortage in mid-2010 based on present rates of production. Thus, expansion in production of houses and cars in 2010 is the forecast and that's the engine of economic recovery.

I don't see any other possibility of economic growth coming anywhere else. Europe is likely facing a longer (though less deep) downturn than the US and probably will lag for a year or more after the beginning of US recovery. There is roughly "zero" prospects of any return to economic growth in Europe without a recovery in the US and China.

All of China's efforts right now are focused on propping up their failing export sector. A huge boost in domestic spending in China would only be a drop in the bucket compared to the losses on the export side.

So, upon consideration of all relevant factors, I think it is safe to conclude that this current recession will end in exactly the same way the last half-dozen recessions have ended - with US consumer spending on houses and cars. All relevent predictions available in the media right now are based on this analysis. I see no reason to believe otherwise.

The fact that the US auto and housing industries are presently the hardest hit sectors is a measure of how severe this recession really is. But that doesn't change any of the fundamental facts here.

[Sucre]

I didn't assert that American capitalism was attracting anyone at that time (that's more of an early 20th century thing).

I asserted that horrific conditions in 19th century Europe was the real reason so many millions emmigrated.

This was to counter your assertion that 19th century Europe was some kind of economic paradise - I think it was a hellhole at that time.

Dickens provides an excellent portrait of 19th century industrial England. No surprise that people were leaving by the millions.


And given that the farmers made up some 75-85% of the population at the time, the VAST MAJORITY of Europeans were not prospering in the 19th century.


The political structures of 19th century Europe owed more to tradtional aristocratic rule than they did to actual capitalist rule.

I've always held that was a significant 'error' of interpretation that Marx made - he took the political structure of early 19th century Europe and assumed that it was the natural consequence of the development of capitalism - it wasn't. It was the natural consequence of a 1000 years of aristocratic rule in Europe seeking to accomodate capitalism. Only the USA had actual bourgeois/capitalist government at that time.

And socialist movements were a direct result of the hideous conditions of early industrial production. Marx had nothing to do with that - if anything, Marx sought to have his theory 'piggy-back' on the socialist movements (which is why the concept of communism and socialism are so confused - Marx is the cause of that).


Statistically speaking, most wealth transfers over the last three decades have been from the middle class to the rich - within any given nation. Check your data on this.

If anything, quite a few 3rd world countries have successfully transfered vast amounts of wealth from the 1st world to the 3rd world. China, India, Indonesia, Malaysia and the whole of the oil-producing nations all fit this category. All of these nations have significantly increased their relative wealth standing over the last three decades.

Ergo, your point doesn't hold up to scrutiny here.


High population growth never correlates with high econmic growth. Indeed, they usually run counter to each other.

High population growth correlates with a falling average wage/income level (which represents a fall in the average standard of living). This is exactly the case in Europe through the 19th century. Growing populations with falling standards of living. Thus, the impetus for emmigration.

France was (as you noted) somewhat of an exception to this pattern, but this was primarily due to the fact that France was very slow to industrialize. Thus, France didn't experience high growth in industry or population at that time. France was essentially stagnant (economically) through the 19th century (marking France's fall from being the largest economy & military in the world in the 18th century to a middle-rank power by the end of the 19th). Most of this was political it seems - French laws prevented capitalist enterprises from flourishing at that time (many leftovers from Louis XIV's industrial policy which was pure mercantilism).


Yes, it was the first choice, but it was a tough choice and wasn't an easy life. The hardships of settlement in a barren land with hostile natives and thousand mile journies, backbreaking efforts to clear the land for farming and all that. Fact is, it took some real ugly conditions in Europe to make option this look even remotely attractive.
* Nothing in your post contradicts what I wrote. Horrific conditions yes, but for a part of the population in on the whole very successful economies, in fact the most succeful economies on earth.

It is not because the economy is going well, that the overall living standards rise. (*)

If the repartition of the incomes would have been any better and plant workers rewarded for their work, emigration would not have been necessary.

Growing population could have been easily coped with a better distribution of the profits of industrialisation. This did not happen though, for lack of "socialism", and these population emigrated.

The populations who left Europe did not leave any better in the USA for that matter. The economy there was not much better and they had to work hard for little income. Maybe the second or the third generation maybe ...

But the big difference was : Hope for this children - not the economy (what is implied - or what I understood from your original post)

** Reg. France, I don't understand why anybody would immigrate to a country which was, as you rightly noted, retarded in industrial matters ? The third economy in Europe only. What the point ? On the other hand thousands left England (1st economy) and Germany (N°2) which were thriving economically. It doesn't make sense, does it ?

What is your answer to the French paradox ?

---
(*) A very similar situation to nowadays

[Michael]

If the repartition of the incomes would have been any better and plant workers rewarded for their work, emigration would not have been necessary.

Growing population could have been easily coped with a better distribution of the profits of industrialisation. This did not happen though, for lack of "socialism", and these population emigrated.
Yes, this is generally true. Emmigration from Europe came from those places with the most nasty and greatest growth in industrialization - and the high taxes the state put on agriculture to fund it. This made the majority peasants worse off - though I gather the goal was to get them to move to the cities to become wage-workers - or to emmigrate. It is to be sure that none of the nations of Europe in the 19th century put up any barriers to this large outbound population.

The populations who left Europe did not leave any better in the USA for that matter. The economy there was not much better and they had to work hard for little income. Maybe the second or the third generation maybe ...

But the big difference was : Hope for this children - not the economy (what is implied - or what I understood from your original post)
Well, maybe for the homesteaders on the Oregon Trail, but the working poor in USA were better off than the working poor in Europe at that time.

For example, European standards of living took some really big jumps in the post-WW2 period to 'catchup' to that of the USA. That means that standards of living in Europe during the first half of the 20th century had to be below that of the USA (running water, sanitation, electricity, food production, birth and death rates, diseases, etc). I believe that it was the latter half of the 19th century when these numbers started to diverge between Europe and USA - exactly the time period when the largest scale immigration was moving from Europe to US.

** Reg. France, I don't understand why anybody would immigrate to a country which was, as you rightly noted, retarded in industrial matters ? The third economy in Europe only. What the point ? On the other hand thousands left England (1st economy) and Germany (N°2) which were thriving economically. It doesn't make sense, does it ?
Well, it makes sense only because of the huge growth in the population that is associated with early industrial development. Railroads, fertilizers and tractors make farming & food distribution much improved (and less labor intensive).

It is important to also note the key political change in Britain with the end of the "Corn Laws" which up until 1840s involved a big tariff against importing grain - to protect (aristocratic-owned) British farms. By ending the Corn tariff, the price of grain in Britain dropped - making food for the working poor much cheaper. This is where the big boom in population that the British emmigrants comes from, not taxes on agriculture. It is symbolic of the eco-political power shift from the old landed aristocrats (who wanted a high tariff on imported grain to protect their landed estate revenues) to the new industrial and middle classes (who wanted a low tarif on imported grain because they bought their food in stores).

It is also noted (in Scotland in particular) the Enclosure Laws were designed by the largest landowners to convert their land from small rented out farm plots to large open fields for sheep grazing - to sell wool to the big mills. Like the English dropping of grain tariffs, this had the effect of pushing lots of peasant farm workers off the land and into the cities (or to immigrate).

What is your answer to the French paradox ?
As I suggested earlier, it was French political barriers to the advancement of capitalism. French kept up high tariffs on grain through the 19th century which kept the wealthy landowners happy and their peasants modestly prosperous. This prevented the influx of landless wage-labor to the cities that the capitalists needed. It also avoided large exodus to the new world at that time. Similarly, French politics keep taxes on the farmers low and thus, taxes on the urban based commerce were higher. Thus, France 'stagnated' in industrial development during the 19th century - when compared with Britain, Germany and northern Italy. No 19th century boom in industry means no 19th century boom in population.

Thus it was Britain, Germany and Italy that sent the most immigrants to North America at that time. Nothing paradoxical about that.

(*) A very similar situation to nowadays
Not necessarily. If you have a rising population, a rising standard of living requires a rising economy. You can have a rising standard of living with a stagnant economy but only if you have a falling population.

[Sucre]

As I suggested earlier, it was French political barriers to the advancement of capitalism. French kept up high tariffs on grain through the 19th century which kept the wealthy landowners happy and their peasants modestly prosperous. This prevented the influx of landless wage-labor to the cities that the capitalists needed. It also avoided large exodus to the new world at that time. Similarly, French politics keep taxes on the farmers low and thus, taxes on the urban based commerce were higher. Thus, France 'stagnated' in industrial development during the 19th century - when compared with Britain, Germany and northern Italy. No 19th century boom in industry means no 19th century boom in population.
This may explain why France stagnated in industrial matters or why it kept emigration low, but it does not tell why it attracted immigrants from all over Europe ...

[Americano]

This may explain why France stagnated in industrial matters or why it kept emigration low, but it does not tell why it attracted immigrants from all over Europe ...

That would most likely be social programs.

[Sucre]

That would most likely be social programs.
Not in the 19th century. Besides, the first "social programs" were developed by Bismark in Germany in the 1890s. Yet, it was a time when Germans were expatriating in mass.

No, I still stand to my opinion that demographic factors play a predominant role in e/immigration. Over economic factors and in any case over cutural/ political attraction. At least the bulk of immigration/ emigration is demography lead.

Economy plays an important role, of course, but if you look closer you will see that it is a consequence of demography.

If France had had a booming population in the 19th century, even the high price of grains mentioned by Michael would not have been sufficient to keep the land owners happy. Resources would have become scarce. Adding to this that industrialism came in late, in the 1850s in France, the over population would have had to leave the country for better life prospects.

But the population stagnated, from the French Revolution to WWII it did not grow. On the whole it was a wealthy nation, resources were sufficient. There was no reason for the French to emigrate. Not just that : the regime was liberal and, as the USA, and for the same reasons, its law of nationality was based on jus solis and not jus sanguinis (as in the rest of Europe) i.e welcoming to foreigners. Therefore France was also an immigration country.

[phungus420]

How did Germany's economy recover in the 30s?

[Sucre]

Unfortunately thanks to the war efforts ! Although one might mention a few civil projects as well such as the first "Autobahn", motorway in Europe.

The same can be said about the USA. The US economy really picked up because it had to deliver weapons to the English etc. followed by the war.

Utter destruction for reconversion. This is scary.

[phungus420]

Bull, Germany's economy was exploding in 1938, steaming...

It wasn't the war that pulled them outta the slump...

Though I'm interested to hear micheal's take on this

[Michael]

How did Germany's economy recover in the 30s?
Government spending on armaments production & military expansion.

This option is NOT really avialable to the US economy at this time since the US economy has been running that kind of policy non-stop since 1945.

Russia or China (or Brazil) might be able to follow that path here, or any of the European countries.

To my mind, the real parallel here is the 1970's oil shock. That produced huge losses for corporations, shortfalls for government revenues and a big downturn that was fought with massive piles of public debt, igniting a period of high inflation with high unemployment. That's the most probable scenario I see repeating here over the medium term.

And just like the 1970s, just as soon as the critical danger passes, everyone will forget what happened and why it happened as they set out to do it again.

[Sucre]

Bull, Germany's economy was exploding in 1938, steaming...

It wasn't the war that pulled them outta the slump...

Though I'm interested to hear micheal's take on this
No, it wasn't the war but the preparation to the war : spending on armaments etc. So yes : this makes a booming economy in 1938.

The war itself damaged the German economy.

[Sucre]

To my mind, the real parallel here is the 1970's oil shock. That produced huge losses for corporations, shortfalls for government revenues and a big downturn that was fought with massive piles of public debt, igniting a period of high inflation with high unemployment. That's the most probable scenario I see repeating here over the medium term.
Except for the public debt, the similarities with the 1929 are far more striking : financial crisis outgoing from the USA and spreading to the world, preceded by a stock market crisis and followed by a bank crisis, panic reactions until the real economy gets hurts and companies go bankrupt and millions lose their job.

That's when it starts to get interesting. The 1930s was a decade of social turmoil and ended in a World War. Of course, the WW can not be traced back to the Great Depression and would have happened anyway.


And just like the 1970s, just as soon as the critical danger passes, everyone will forget what happened and why it happened as they set out to do it again.
But that is always like this ... The human mind is made this way.:angel:

[Michael]

Except for the public debt, the similarities with the 1929 are far more striking : financial crisis outgoing from the USA and spreading to the world, preceded by a stock market crisis and followed by a bank crisis, panic reactions until the real economy gets hurts and companies go bankrupt and millions lose their job.
I don't see parallels with 1929 at all. A minor stock crash was nothing and didn't trigger any meltdown of international banking and trade at all. That all happened some 3-4 years later, caused by government policy, not the stock crash of 1929.

The breakdown in international trade occured because of the strong protectionist measures and massive government spending cuts introduced by the Hoover Administration. When every major western nation copied this policy, the Great Depression was born.

Bottom line is that the Great Depression was caused by public policy and was entirely an issue of eliminating trade. Killing trade kills everyone's economy and everyone suffered greatly for it.

The present situation doesn't seem to have many parallels to 1929 at all. 1929 didn't have global banking, didn't have derivatives and the US didn't have a national banking sector. These factors change everything about the present situation vis-a-vis 1929. The outcome might look similar, but from a public policy perspective, they are quite unlike.

In other words, if our present situation was just like 1929, we've got solutions for that. Fact is, our situation isn't like 1929, which is why our governments are flailing around trying to find a solution.

That's when it starts to get interesting. The 1930s was a decade of social turmoil and ended in a World War. Of course, the WW can not be traced back to the Great Depression and would have happened anyway.

But that is always like this ... The human mind is made this way.:angel:
I agree that WW2 was going to happen regardless of anything that happened during the 1920s or 1930s. Clemanceau made certain of it (Clemanceau was the inspiration and the leading proponent of the most ugly elements of the Treaty of Versailles - the original Treaty was much better, but Clemenceau refused it and insisted on the 'hardline' for Germany, making WW2 virtually inevitable).

[Sucre]

I agree that WW2 was going to happen regardless of anything that happened during the 1920s or 1930s. Clemanceau made certain of it (Clemanceau was the inspiration and the leading proponent of the most ugly elements of the Treaty of Versailles - the original Treaty was much better, but Clemenceau refused it and insisted on the 'hardline' for Germany, making WW2 virtually inevitable).
You give a lot of credit to just one man for the most important event in the 20th. I don't believe Clémenceau, or for that matter Hitler, "made" the War happen. If it had not been "them", it would have been somebody else.

Behind these individual figures (and notwithstanding their personal responsibility), there are loads of people to support them. Group dynamic is more important than one single personality.

And obviously the "defense" is to weak to confront them, isn'it ?

In fact, Clémenceau, a hardliner of WWI, lost the election in 1919 - mind you, not because the Versailles Treaty had been found too hard but because there was a majority within the French population which thought that it was too benevolent to the Germans.

I think therefore that the origins of WWII are to be found there : in the "leftover" of bitterness and hate of WWI and its millions of young men dead and of complete destruction (90% on the French territory ...). The Versailles Treaty is a consequence of this bitterness. The rightist movements in Germany as well. Just because of these "unsolved" problem and bitterness - reflected very well in the literature of the time - I am inclined to think that WWII would have happened with or without the 1929 crisis *. It would have happened nevertheless. Regardless of any other event between 1919 and 1939. Because there always come a time when hate spills over ...

(* After all, in 1938 the German economy was blooming, so that it is not always just the "economy", or lack of it, that leads people to war ...).

[Michael]

You give a lot of credit to just one man for the most important event in the 20th. I don't believe Clémenceau, or for that matter Hitler, "made" the War happen. If it had not been "them", it would have been somebody else.
You are correct that it was not just one man. It was the French hardline at Versailles that made WW2 essentially inevitable. I tag Clemenceau as representative of that.

My point is that the Versailles treaty made WW2 inevitable. Hitler was 'sufficient' for WW2, but not 'necessary'. I firmly believe that Germany was going to go that route, with or without Hitler as leader.

And to clarify my point here, Hitler was personally responsible for making WW2 as ugly as it was. I say WW2 may have been inevitable, but there was nothing inevitable about Germany baking Jews in ovens or slave labor camps - those are the crimes that Hitler carries a direct responsibility for. But the war was going to come. WW1 was unresolved - a rare "failed war".

Behind these individual figures (and notwithstanding their personal responsibility), there are loads of people to support them. Group dynamic is more important than one single personality.
Yes, the group dynamic in France 'caused' the hardline at Versailles and the group dynamic in Germany as a result of that, 'caused' WW2.

...I am inclined to think that WWII would have happened with or without the 1929 crisis *. It would have happened nevertheless. Regardless of any other event between 1919 and 1939. Because there always come a time when hate spills over ...
Which is my point. WW2 was inevitable. The die was cast at Versailles. Or perhaps, the die was cast in July 1914 with a bunch of telegrams full of pride and hubris.

(and no, I don't think the gunshot at Sarajevo in 1914 was all that significant)

(* After all, in 1938 the German economy was blooming, so that it is not always just the "economy", or lack of it, that leads people to war ...).
Indeed. War is rarely inspired by economics. War is a game of passion and power.

Btw, this thread must have the record at this forum for having the most off-topic digression - we are so far off topic, I can't even fathom what the topic in this thread is any more!

[Sucre]

Yes, there are a lot of disgressions on this thread but I don't think it matters.

The starting point was how will the economy will pick and you provided an answer - growth of consumption through population growth - which I find unconvicing.

For at least two reasons :
1) Because the crisis we are going through at the moment is primarily a consumption crisis : the stock market and financial bubbles are a consequence of this consumption crisis, with a middle class earning less and less and obliged to run into debt to keep on the economic machine running. The burst of these bubbles will of course significantly worsen this consumption crisis as unemployment surges.
2) As I see it, only innovation creates value which in turn creates lasting/ solid growth. A rise in consumption creates no value. In fact, that was precisely the illusion of the last 15 years to believe that consumption per se creates value. It creates bubbles.

We agreed in one of the digressions on this thread, that the world financial crisis of 1929 and ensuing economic recession was only solved by the efforts in armaments, of Germany but also of the USA. The armament industry is a continous source of innovation.

You also mentioned the 1970s crisis. The US economy got back on track thanks to IT innovation.

Otherwise I don't see how consumption alone, and based on the growth of a population, may get us out of trouble, it may at best stop or prevent a deflationary spiral.

This is why I do not believe too much in the effectiveness of the stimulus, be it in the US or in Europe - although on the other hand I understand the need of action of governments and the stimuls may alleviate part of the human misery.

[Sucre]

And to clarify my point here, Hitler was personally responsible for making WW2 as ugly as it was. I say WW2 may have been inevitable, but there was nothing inevitable about Germany baking Jews in ovens or slave labor camps - those are the crimes that Hitler carries a direct responsibility for.
I'll just pick this point here because this is precisely where I think we should be careful. The difference between personal responsibility and historical responsibility.

Hitler bears a personal responsibility in sending the Jews to concentration camps. The same Hitler, however, in 2009 would not have 10% of the success of the Hitler in 1929. He would be considered a weirdo, which he was, mentally ill, which he was, but there is no way nowadays Germany would follow him that far. Or did he kill 6 million Jews just by himself ?

Ergo. If you want to understand the phenomenon in the 1930s, it is not enough to study Hitler's personality and personal history, you need to understand what made 60 million Germans follow him.

It is a way to "read" history or to tell "history" which we have kept from schools to give so much credential to "Great Men". Actually, I will go even further and say that it is a patriarcal way of reading history, reflecting the patriarcal structure and beliefs of our societies. There is the Patriarch, there is the Chief, there are those Great Men who have made History.

But these Great Men would have been nothing without the millions of anonymous followers.

Is Bush responsible for the Irak War ? Rumsfeld ? What made such a clever man as Powel ridicule himself in front of the UNO in 2003 ? The fact that we live in democraties makes power transparent.

I see that this is a topic which would need a thread of its own.