14 Jul 10 The New Deal

Those of you who are regular readers of my blog will be familiar with my view that the real impact of any recession is felt when the economists call the recession over. It’s only after a recession is technically closed that the real driving forces of change (I’m talking primarily political and socio-demographic drivers here) come into play. If you’re interested in the phases of change that I think come after the economically declared end of a recession – take a look at this post – Navigating the Waves of Change.

Martin Wolf makes a good job of focusing our thinking on the post recession world in his article Three Years and New Fault Lines Threaten[1]. Apart from supporting the view that there is more turbulence ahead (especially for the developed economies), he draws attention to:

(a) The fact that the “deals” that we have been used to in the developed world are bust – permanently bust. These deals are, in Europe, the great social safety net and in the US the goal of full employment.
(b) Potential problems with the “export panacea”. There are calls, particularly in the developed economies of the UK and US with a high financial services sector dependency, to go back to a tangible goods export-based economy. But the point that Wolf makes is that this in turn exposes the exporting countries to a range of risks (not just economic) within their foreign target markets.

So where could we be going?

Wolf points to the real dangers of deflation and the double-dip recession.

If these do events occur, then many, if not all, of the assumptions that we have made about globalization will seem like a Panglossian dream.

Consider:

• New political and economic alliances
• Economic “iron curtains”
• The prospect of significant political change especially in the hardest hit of the developed economies.  If the “deals” that consumers in the developed world depended upon are dead then consumers will look for new sources of security.  In the dim light of a slow, largely jobless recovery, even the sight of a centrally state planned economy  could look like an attractive New Deal.

And who said that we just had to sit this one out?

References
[1] Wolf, M. Three Years on and New fault Lines Threaten. Financial Times. July 13 2010.

Tags: communism

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