Chapter 30 Section 5 The Great Recession of the World Economy

In 2009, the world was in the midst of a financial crisis that had never happened in a century. The International Labor Organization estimated that the number of unemployed people in 2009 was as high as 50 million. China was not immune to the crisis alone.Human beings still have lingering fears about the Great Depression from 1929 to 1933. Facing the world financial crisis since 2008, they feel confused and fearful about the future. In 2001, the Chinese economy had just come out of the negative impact of the Southeast Asian financial crisis, and then encountered the bursting of the US Internet bubble, and the US economy and the European economy slowed down simultaneously.China's economic external demand has become more uncertain and faces severe challenges. After 2003, China's economy began to pick up, and there has been a golden period of "high growth and low inflation" for five consecutive years. In 2009, China's economy was affected by the world financial crisis, its exports dropped sharply, and the number of unemployed people rose rapidly, facing another severe test.I wrote two articles in 2001, looking back now, the suggestions at that time were basically feasible.Today, when the per capita income is US$3,000, the Chinese government adopts a proactive fiscal policy and a moderately loose monetary policy, which are effective means to deal with the economic challenges China faces in 2009. In 2009, the world economy will experience a rare recession, and it will take 3 to 5 years for the US economy to emerge from the recession.During this period, we need to "be firm and calm, and fight a protracted war; when two armies meet, the brave will win."

Economic activity in the United States continued to decline from mid-1929 to early 1933, causing the Great Depression that engulfed the world.No previous depression has been this large or lasted this long. At noon on October 24, 1929, the stock price of the New York Stock Exchange in the United States plummeted. By mid-November, the stock price of the New York Stock Exchange fell by more than 40%. The unemployment rate in the United States rose to the highest peak of 25%. In other years in the 1990s, it has remained above 15%.The total output value of world industrial production dropped by 36%. Countries practiced trade protectionism and competitive currency devaluation at the expense of their neighbors. World trade dropped from 2.9 billion US dollars per month in 1929 to 1 billion US dollars per month in 1933, shrinking by 2/3.

In his article "The Great Depression of 1930", Keynes accurately described the tragic situation at that time: We are currently in the midst of a catastrophe, a depression of business, a rise in unemployment, and a loss of business of a magnitude unprecedented in the modern history of the world.No country has been spared.Millions of families throughout the world are now living in a state of extreme poverty and panic - sometimes worse.According to my estimates, the total number of unemployed workers in the world's three major industrial countries - Britain, Germany and the United States - is about 12 million.But I am not sure whether the human misery is any greater in the principal agricultural countries of the world—Canada, Australia, and the countries of South America.Millions of small farmers there have suffered huge losses due to the collapse of agricultural product prices, so that they have fallen into bankruptcy, and their agricultural product income is far below the production cost consumed.For the effects of a fall in the prices of some of the principal commodities of the world, wheat, wool, sugar, cotton, and most other commodities, have been disastrous.Prices for the vast majority of products are now below pre-war levels; however, their costs are notoriously higher than they were before the war.Wheat was said to have been sold in Liverpool a fortnight or two ago at the lowest price it had ever recorded since the reign of Charles II two hundred and fifty years ago.Under such circumstances, how can farmers survive?Of course, this is impossible.

Roosevelt became President of the United States on March 4, 1933.Facing the crisis, he promulgated a series of "New Deals", declaring that "the only thing we worry about is worry itself". In 1934, a surprising rebound in private investment in the United States led to a recovery in consumption.At the same time, agricultural prices rose sharply, and the economy grew rapidly after 1934. Economists who have thought about the Great Depression in the 1930s have put forward several possibilities for the cause of the Great Depression: 1. Mistakes in monetary policy.The Fed did not maintain the gold standard at the expense of the domestic economy.

Second, fiscal policy mistakes.US President Hoover did not try to maintain a balanced budget when a depression loomed, and did not use large fiscal stimulus through deficits. 3. The banking system collapsed.Government officials did not inject capital quickly into ailing banks to quell the bank panic that had spread in 1930-1931. When one bank failed, the panic spread and depositors rushed to other banks to run on them. Fourth, trade protectionism.The supply-side school attributed the Great Depression to international trade protectionism. In 1930, the U.S. passed the Smoot-Hawley Tariff Act, raising the average import tariff from 33% to 40%, and imposing tariffs on more than 20,000 U.S. imports. Retaliation from various countries caused world trade to shrink sharply.

5. Investment opportunities dry up and innovative activities cease.This is Schumpeter's point of view. In my opinion, the main reason for the "Great Depression" is the supply side. Investment opportunities have been gradually reduced, resulting in a slowdown in economic growth.Of course, poor demand-side policies also exacerbated the recession. After World War II, the United States became the world's economic and financial center.Over the past 100 years, the U.S. economy has maintained an average growth rate of around 2% to 3% for a long time, which basically represents innovative growth in frontier fields and has become the most important locomotive of the world economy. In 2009, the population of the United States accounted for only 5% of the world's population, but its total economic output exceeded 25% of the world's total output value. Its per capita output value is much higher than that of other major countries in the world.The United States is a consumption-led growth model with a large domestic market and a very inward-looking economy.The U.S. service imports and exports rank first in the world.The sustained high-speed growth of the US economy in the 1980s benefited from the painful industrial restructuring in the 1970s and the rise of new general-purpose technology industries centered on information technology.

After entering the 1990s, the United States experienced the fastest growing decade after World War II. While maintaining high-speed economic growth, the domestic inflation rate has also been kept at a very low level.The new economic sector represented by the information industry is one of the main sources of growth.The average annual growth rate of the information technology industry in the United States is much higher than the growth rate of the economic aggregate. Research by the US Department of Commerce shows that the output value of the information industry accounts for an increasing proportion of the entire economic aggregate, driving more than a quarter of economic growth. In 2001, Greenspan, former chairman of the Federal Reserve Board of the United States, said in his speech "Analysis of the Current U.S. Economic Situation": "For the U.S. economy, the past 10 years have been unusual. The interaction of core technologies has significantly increased the high The expected rate of return on technology investment induces an increase in capital spending by firms and significantly raises the potential growth rate of productivity.The capitalization of these higher expected rates of return drives up asset prices and affects households in a fairly wide range of goods and services, especially new dwellings and durable goods. The growth in spending even outpaced the growth in real incomes, which had already risen."

Global over-optimism about the new U.S. economy eventually led to a stock market bubble.As shown in Figure 3-18, starting from 1999, the Federal Reserve gradually raised short-term interest rates in order to control inflation, and finally burst the stock market bubble in 2001, and investment in the information industry dropped sharply.However, due to the strong growth of US consumption, it did not lead to a recession in the US economy.One would think it was all Greenspan's fault for cutting rates too far and keeping them too low for too long.However, Greenspan can only control the 3-month short-term interest rate, and is basically powerless to the 5-year medium-term interest rate in the US Treasury market.When the Federal Reserve lowered short-term interest rates again in early 2001, countries around the world and investors were overly optimistic about the growth prospects of the United States, and were willing to buy U.S. government bonds of more than five years at low interest rates and lend money to the U.S., resulting in the interest rates of U.S. medium-term and long-term treasury bonds. It also fell sharply, which encouraged the long-term decline of US medium-term interest rates.Figure 3-18 shows that the US 5-year treasury bond rate, which is closely related to housing loans, was quite low during 2002-2005.Figure 3-19 clearly shows that after the stock market bubble burst in 2001, investors still had strong optimism. In the four years from 2003 to 2007, the price-earnings ratio of the US stock market remained at around 25, much higher than 15. historical average.It was not until the outbreak of the financial crisis that the price-earnings ratio returned to the 15 level.Therefore, the world financial crisis in 2009 was the result of irrational optimism among world investors about the growth prospects of the United States.

A prolonged period of low interest rates has two effects: first, low interest rates prompt investors to assess the risks ahead with an overly optimistic outlook, and in this context, as optimism prevails, market discipline fails and due diligence is outsourced to credit ratings Second, low medium-term interest rates have created huge demand in the real estate market: on the one hand, as mortgage rates fall, more people will become able to buy houses and qualify for mortgages.While lowering interest rates, housing loan institutions in the United States continue to relax mortgage standards, especially for customers with lower income and lower credit ratings, and develop various new types of loans, such as adjustable interest rate loans. The interest rate is very favorable, and after five years, the interest rate will be reset according to the current market, but people are more optimistic about the future, and they are not very worried that the interest rate and mortgage interest rate will rise sharply in the later period of five years.

In 2004, I was shocked by two things: first, loans were everywhere in the United States, even barbershops and real estate agencies were handling this business; second, mortgage interest rates were not unbearably high, but unbelievably low.Too low medium-term interest rates stimulated mortgage loans and excessive consumption, resulting in the emergence of a real estate bubble during 2002-2006 (as shown in Figure 3-20).These buyers are vulnerable to the risk of interest rate fluctuations, and once the low interest rates rise, they will lose their ability to pay.The decline in personal saving and the increase in household debt led to the start of a US current account deficit and excessive consumption.

The U.S. dollar is a common currency in the world. Despite the depreciation of the U.S. dollar and the attention of world public opinion, the central banks of various countries have not significantly reduced their U.S. dollar assets, which shows that the yen and euro assets have not gained much appeal due to the depreciation of the U.S. dollar.However, the US Federal Reserve considers more of the domestic economic cycle when formulating monetary policy.When domestic goals conflict with international goals, domestic goals will definitely overwhelm international goals. The Latin American debt crisis in 1982, the Mexican financial crisis in 1994, and the economic crises in Brazil and Argentina in 1997 all preceded these crises by the United States raising interest rates sharply in response to domestic inflation, which became a source of international capital outflow from these countries. Key factor. Since 2006, the inflation rate has risen moderately, the US Federal Reserve has gradually raised short-term interest rates, and the persistently low 5-year treasury bond interest rate has also suddenly risen (see Figure 3-18).At this time, the borrowers who adopt the 5-year adjusted interest rate face an unimaginable high mortgage loan interest rate.Real estate prices began to fall slowly after 2006, refinancing became difficult, and houses became difficult to sell. As a result, bad debts began to snowball, and the US subprime mortgage crisis broke out. The EU also has varying degrees of excessive debt in the household sector and real estate bubbles, and the economy is also declining rapidly. Due to the "sclerosing syndrome" in Europe, it is unlikely to expect the European economy to recover first.The Japanese economy fell by 12% in the fourth quarter of 2008, and even the world-renowned Toyota Motor Corporation suffered its first loss after World War II.The international oil price has plummeted from the peak of 140 US dollars per barrel to below 40 US dollars.The characteristics of Russia's "oil economy" are prominent, and its economy is insufficiently diversified. Emerging market countries have encountered a sudden backflow of international capital and are facing the risk of a capital account crisis. Several emerging market countries have asked for help from the International Monetary Fund.Primary products and oil fell far more than products with high added value, and the situation of developing countries was even more difficult. Keynes said of the Great Depression of 1930: "These are the points I would now like to draw your special attention to: first, to appreciate the extreme seriousness of the present situation, about a quarter of the working people are already idle; second, This economic disaster is worldwide, and we cannot rely on our own strength to get out of the predicament; thirdly, we can still make a difference, we must have an active mental outlook, do some practical things, and vigorously promote consumption , so that big businesses can get back on their feet." At first glance, the problem of the US economy lies in the consumption side, because after all, it is the excessive consumption of residents and the real estate bubble that triggered the subprime mortgage crisis.People's consumption decisions are positively related to their expected lifetime income.Lifetime income (or permanent income) is important.Lifetime earnings in turn depend on expectations of future earnings.The reason for excessive consumption in the United States is that there is an overly optimistic expectation of lifetime income.Therefore, the root cause of the U.S. financial crisis lies in the supply side. The U.S. economic growth has not met the expectations of U.S. residents and international investors. From 2001 to 2006, under the circumstances of ultra-low short-term and medium-to-long-term interest rates, American corporate investment has been like a "drug that cannot be raised" since 2001, and the information industry has not recovered as expected. Since the "new economy" in the United States in the late 1990s raised the expected return on capital and attracted a large amount of capital to flow into the United States, the U.S. capital account generated a large surplus, while the current account deficit deteriorated to a greater extent. As shown in Figure 3-21, information capital in the United States began to accumulate rapidly after 1967. Research and development of cutting-edge IT core technologies are highly capital-intensive, and the increase in workers in the information industry is not linear.Figure 3-22 tells us that the number of employed people in the information industry was basically flat in the early 1990s, and began to rise rapidly from 1994 to 2000. After the bubble burst in 2001, total employment declined significantly. With the accumulation of information capital, the wage price of the information service industry is gradually rising. Figure 3-23 shows that the average salary of the information industry in the US is much higher than that of non-agricultural industries, and the labor force should continuously transfer from other sectors to the information industry.However, this contradicts the decrease in employment in the US information industry after 2001 shown in Figure 3-22.Information services do not absorb manufacturing labor on a large scale. Figure 3-24 shows that the US economy has a much higher job creation capacity than the Japanese, French, and German economies.On the surface, the relatively high growth rate of the U.S. economy also shows that the U.S. labor market is very flexible and resilient.With such a flexible labor market and the fact that wages in the information industry are much higher than those in other industries, there is still not enough labor in the US information industry.This can only illustrate one problem, that is, there is a serious shortage of qualified information industry workers in the US domestic labor market.Due to the lack of qualified information industry workers, as shown in Figure 3-25, the contribution of the US information industry to overall economic growth has gradually declined since 1997, and the US economy has also slowed down accordingly. The U.S. economy is likely to remain stagnant for some time despite policymakers' continued monetary and fiscal policy stimulus.This kind of policy failure is like Japan in the 1990s. It cannot rely on repeated "stimulants", but must carry out drastic economic system reforms.The U.S. economy should carry out "supply-side" structural reforms, and blindly fiscal stimulus is "a temporary cure, not a permanent cure." In February 2009, 201 American economists jointly sent a letter to President Obama, opposing his economic stimulus plan.They said in the letter: "Although all economists are now Keynesians, and we all agree to greatly increase the government's fiscal deficit, we do not believe that government spending will improve the economic environment. In the 1930s, President Hoover and President Roosevelt's government spending did not bring the United States out of the Great Depression. Government spending did not prevent Japan from experiencing a 'lost decade' in the 1990s. Therefore, it is unrealistic to hope that government spending will save the United States To improve the economy, policymakers need to rely on broad-based reforms to remove impediments to employment, savings, investment and production. Lower tax rates and reduced government deficits are better fiscal policies.” The US economy is undersupplied with knowledge workers.American human capital has stagnated since the 1970s. In April 1983, commissioned by the U.S. Federal Department of Education, the National Council for Educational Excellence submitted an education report titled "The Nation is in Crisis—Educational Reform Is Imperative," which expounded the urgency of educational reform in the United States.The report issued a stark warning: “Every generation of Americans outstrips their parents in education, literacy, and economic earning; for the first time in our nation’s history, a generation will acquire skills from education that will Will be equal to, not even close to their parents." Did the 1983 report "A Nation in Crisis—The Imperative for Educational Reform" have any effect? On March 11, 2004, Greenspan testified before the U.S. House of Representatives Education and Workforce Committee on the state of education in the United States, saying, "In general, technological proficiency (for the 1960s and 1970s) increased to accommodate the The need for complex capital accumulation. But over the past 20 years, real earnings of skilled workers, especially high-skilled workers, have grown substantially faster than average-skilled workers. Contrasted with this trend, real wages of low-skilled workers have been below-average , or even no growth. Such a relative wage differential means that we have a shortage of high-skilled workers and a surplus of low-skilled workers.”The management guru Peter Drucker predicted the emergence of "knowledge workers", but there are serious problems in American education, and the number of "knowledge workers" produced is far from keeping up with the requirements of the development of the information industry. In my opinion, there are three reasons for America's educational problems.The first is that the federal government's investment in education is far from enough.On the surface, the US government takes education very seriously.For example, during the Clinton administration in 1994, Congress passed the "Goal 2000: American Education Act". On January 8, 2002, President Bush officially signed the No Child Left Behind Act.But in fact it is "thunder, rain, little".The US federal government's investment in education is less than 100 billion US dollars, which is much smaller than the interest paid by the US federal government on national debt.The US state government's financial expenditure on education is already quite high, reaching about 30%.Therefore, the U.S. federal government has no money, local governments have no more money, and the implementation of multiple national education bills has been greatly compromised.The second is that the labor force in the information industry is not enough.In the United States, scientific literacy is lower than in other Organization for Economic Co-operation and Development (OECD) countries.The third is that after the "9.11" terrorist attack, the policy on overseas immigrants and students has become more stringent.The US information industry needs a large number of "knowledge workers". Before "9.11", these knowledge workers mainly came from other countries; after "9.11", the supply of knowledge workers in the United States is still insufficient, and knowledge workers who immigrate overseas are also restricted.Therefore, due to the serious lag in the reform of the US education system and the narrowing of the immigration policy, the labor supply of the information industry is insufficient, which restricts the development of the industry. "To untie the bell, one needs to tie the bell."The U.S. economy is still in the position of the world economy, and cannot shirk its responsibility for the world economy. In 2009, the United States still occupies the forefront position in the information and biological industries, and the United States also has a large number of world-class economists.However, the task of reforming the US economic system is heavy.Major surgery should be done on education, and financial investment in education should be increased; supervision should be strengthened in the financial field, households should increase savings and adjust their balance sheets, oppose trade protectionism, and maintain the world free trade system.