Key predicts future recessions

Written By: - Date published: 11:31 pm, May 17th, 2010 - 11 comments
Categories: Economy - Tags:

I’m really surprised that this comment from John Key hasn’t elicited more reaction:

“[Future] recessions are almost certainly in my view going to be global in nature and probably more severe… I think the question is not whether there is going to be another global recession but when that recession is going to hit.”

I wrote the other day about the rock and the hard place that the world’s economy finds itself between.

On the one hand, any economic recovery will see oil prices quickly rise to economically damaging heights. We are near or at peak oil and the manifestation of that will be repeated recession-causing supply crunches, like the one the IEA predicts for 2012.

On the other hand, the toxic assets that the banks loaded themselves up with haven’t disappeared, they have just been bought up by governments or by institutions using money they’ve borrowed from the governments for free.

The governments have funded this effort to save capitalism from itself with massive borrowing from the same banks who they bought the toxic assets off and who are now making a mint lending the government’s money back to themselves. On top of that, governments had to maintain their spending and stimulate their economies to end the recession. So, they loaded with debt.

Which will cause the next global recession? Dodgy debt or expensive oil? Looks like debt.

All of a sudden the steady rise in oil prices has reversed. In fact, the price has dropped 20% in the last month. That’s not because of some miraculous new cheap source of oil coming online. It’s not because suddenly oil economies are able to grow with less oil. It’s because the markets are losing their faith in the global economic recovery. The source of their concern: European sovereign debt.

The rich Euro states have put 700 billion into backing their currency. It was intended as a show of force to calm the markets and stop them losing faith in debt from Greece and the other PIGS. It doesn’t seem to be working. (it may also drive the EU into a fiscal union to match its monetary one, which I support).

If a major sovereign debt crisis doesn’t eventuate then confidence and growth will rebound, oil demand will grow, production won’t be able to keep up, and a supply crunch will hit us. The International Energy Agency and a bunch of other groups are picking that will happen around 2012.

11 comments on “Key predicts future recessions”

  1. Jenny 1

    The end is nigh.

    Grant Morgan at Unityblog

  2. Clarke 2

    I think your analysis is a bit rocky on this one, Marty, but for fairly complex reasons. Bear with me on an explanation.

    Sovereign debt is not a problem for any nation that issues its own currency and maintains a floating exchange rate (like NZ), and there is zero chance of “contagion” from the Greek crisis to non-EU countries as a result. All the problems the EU is currently experiencing have to do with their inability to resolve how transfers should work between members and some stupendously idiotic internal rules.

    There are no particular threats to countries such as the US that have transferred bank debts onto public balance sheets, as this is simply the equivalent of running a budget deficit and will not by itself cause a default. In fact, it’s practically impossible for a country issuing its own currency to ever default, assuming it issues its debt in that currency. That’s not to say that the transfer of debt from the private to public sectors is a good policy, however, as it effectively subsidises some truly reprehensible and economically destructive activity.

    In my view a severe future recession is highly likely, not because of the issue of new sovereign debt, but because banks wish to see deficits reduced as they compete with private bank lending.

    If the government increases the money supply through deficit spending, there is less requirement for private sector lending – which in turn chokes off bank profits. This is why every bank economist quoted in the msm will rail about how “bad” government deficits are, and talk up the “risks” and “dangers” of government borrowing. It’s pure bull$%*t. However governments such as our current esteemed leaders have a long history of drinking the neo-liberal Kool Aid, and will proceed to choke off deficit spending as a result – sending the country back into recession, in exactly the same way as happened in Japan during their lost decade.

    So it will be bad political decisions, not debt per se that causes the resumption of the recession.

    You’re 100% right about the peak oil issues, though.

    • Turn off the TV 2.1

      Surely there comes a point though, when so much money is being borrowed/printed to pay the interest on previous debts that the inflation amounts to a de facto default? Wouldn’t the inflation cause capital flight?

      • Bright Red 2.1.1

        I’m sorry but Clarke’s argument is fundamentally nonsense. A government can’t just print all the money it wants without consequences. It causes inflation, even hyper-inflation (most recent example: Zimbabwe).

        Money is just pieces of paper or numbers on a computer screen. It is just a medium for the transfer of wealth. Making more of it does not make more wealth, it just dilutes the medium. And pushes the cost of government borrowing on to others – the buyers of government debt and private savers

        • nzfp 2.1.1.1

          Hold on Bright Red,
          Australian economist Steve Keen (University of Western Sydney) winner of the inaugural Revere Award for Economics (2nd and 3rd place finishers Nouriel Roubini of New York University and Dean Baker of the Center for Economic and Policy Research) and judged the economist who first and most cogently warned the world of the coming Global Financial Crisis argues that we are in a period of debt deflation and unemployment induced by debt saturation – particularly in the private sector – and deleveraging.

          In his July 4th, 2009 article titled “Debtwatch 36 July 2009: It’s the Deleveraging, Stupid” Steve Keen states:

          The US Government is attempting to “pump-prime’ its way out of trouble by public-debt-financed deficit spending, which raises 4 further issues:

          1. this so-called Keynesian remedy can work when private debt levels are relatively low, and government policy to attenuate private speculation is strictly adhered to (see my 1995 paper Finance and Economic Breakdown);

          2. however, in our rampantly speculative economies, this policy has only worked when it has re-started the private debt binge, resulting in rising debt levels over time;

          3. this can’t happen this time around, because all sectors of the private economybusinesses both real and financial, and householdsare already debt-saturated. There is no “greenfields’ group to lend to, as was possible in 1990 when household debt was a “mere’ 60% of GDP, and the derivatives market in finance had yet to explode; and finally

          4. the scale of the private debt bubble is just too big to be countered by substituting public debt for private debt.

          This last point is evident in the data. Even though the US government has thrown the proverbial kitchen sink at government spending, the increase in public debt (which adds to aggregate demand) is more than counteracted by private sector deleveraging (which subtracts from aggregate demand)

    • nzfp 2.2

      Nice one Clarke,
      Well said.

  3. Pascal's bookie 3

    re: oil

    http://www.chron.com/disp/story.mpl/headline/biz/7006307.html

    Thunder Horse is the massive 60,000-ton, $1 billion production platform that BP, after some engineering difficulties, brought into operation in 2008. It was supposed to produce 250,000 barrels of oil a day.It hasn’t gotten close.

    Production from Thunder Horse’s main field reached a peak of about 172,000 barrels a day in January 2009, then began declining, falling to 61,000 barrels by December, according to data from the Minerals Management Service.

    “The field has collapsed,’ said Matthew Simmons, CEO of Houston-based Simmons & Company International, an investment banking firm specializing in energy….

    …While the energy industry talks up the potential of deep-water production, many of the wells drilled so far show rapid declines similar to those that appear to be happening at Thunder Horse. The wells are among the most expensive drilling projects in the world, and the exploration companies need rapid payouts to generate a return on their investment, Simmons said.

    In all, he’s tracked as many as 25 deep-water wells that show rapid declines….

    …”We’ve got to get off being so smug,’ Simmons said of the industry. “The easy stuff is all gone.’

    • Bright Red 3.1

      Wow, that shortfall between what was predicted for daily production and what has eventuated is more than NZ’s daily consumption.

  4. Alexandra 4

    This is called covering ones arse in case the prediction that this recession is over, is wrong. Key can say in the not too distant future (say tomorrow), that his government magnificently managed its way out of the recession and low and behold as he predicted, we find ourselves in another.

    • George.com 4.1

      …or he could say that he was really lucky and that his govt stumbled and bumbled along as NZ dragged itself out of recession and that he hopes he is as lucky next time should another recession occur on his watch.

  5. Jenny 5

    Key’s prediction of another recession may be coming true, sooner than he may have imagined.

    Key claimed that this next recession would be global and it would be worse, New Zealand would not escape.

    With breaking news of a new global down turn creating global currency turbulence, both the NZ dollar and the Aussie dollar dropped as the Euro continued its fall.

    After the Euro tumbled and then continued to slide, Wall Street sank and the Aussie dollar took a nosedive. As the Kiwi slipped below US69c Alan Bollard flagged the risk of “contagion” to New Zealand.

    Talk about Roller Coaster.

    Hang on everybody, Here we go again!!!

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