The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Why It Could All Go L-Shaped

When not writing this blog, the Parallax Brief posts on a couple of superb Russia-based forums aimed at Expats, and uses them to shamelessly promote the content of these electronic pages. However, after linking to his most recent post, on the events likeliest to precipitate a Great Depression of the Twenty Tens, the Parallax Brief took a little heat for his pessimistic views.

Of course, it can be debated ad nauseum just how bad this recession is, but the Parallax Brief’s attention was caught by one post on the RedTape.ru forum which was strongly representative of a view held by pundits and analysts from across the political spectrum:

“It’s a recession. It shall take its course…But then the global economy will start to recover and we shall be, once again, in the “7 years of plenty” stage… until the next recession.”

There is something deeply comforting and commonsensical about this idea that the economy mirrors the waxing and waning of the seasons; the idea that no matter how miserable your life is trudging through streets of slush and treacherous ice in the Moscow winter, eventually summer will return, and those streets will be bounteously filled with Russian girls in (very little) warm weather clothing.

One reason for this is that reality has more of less mirrored this model as far back as we can remember. Recessions in the last sixty years have not reached depression levels, and have usually worked their course in relatively quick order, in the classic V-shape.

Unfortunately, just because we have grown accustomed to this kind of recession in the last sixty years, doesn’t mean this crisis will follow the pattern, and, in fact, things weren’t always as they have been since the end of the war.

Sometimes recessions go so deep, and the recovery starts from such a low base, that it takes many years to reach pre-recession levels – as evidenced by New York Stock Exchange from 1928-1955.

Other recessions, like the ‘Long Depression’ following the bank panic of 1873, reach bottom and stay there for a many years before the recovery starts, and are known as “U-shaped” recessions.

Most famously, the Great Depression lasted near a decade.

And, in fact, Portfolio recently pointed out that we actually have a contemporary example of a never-ending ‘L-shaped’ recession:

“There’s still a feeling out there that, yes, we had a few years of bubble and exess, and surely that bubble needs to be popped, but then we can get “back to normal”. Well, it’s been 20 years in Japan since its bubble burst, and it seems further away from recovery than ever.”

It is always worth reminding ourselves that the seasons progressing in roughly the same way as far back as we can remember is no guarantee it will always be thus. We may be plunged into a permament or long lasting ice age, and summer when it comes might still be relatively cooler than the seasons of today. Equally, just because have been used to relatively mild and V-shaped recessions, doesn’t mean that all recessions must be that way, and our history is replete with examples of this.

The problem is, humans are by nature more likely to discount the idea of black swans.

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