Tuesday, 29 May 2012
This time it is different
During the dot.com bubble, it was common for analysts and economists to explain the huge increase in equity prices in terms of the "new economy". Rapid technological change had transformed the world. The old rules for valuing stocks had changed. The double digit price appreciation of internet start-ups working out of a garage in California wasn't a bubble; it was due to the new fundamentals that drove the "new economy". There was a phrase that summed up the times; "this time it is different".
Investors soon found out that dot.com share prices were just like their old economy counterparts. Profitability mattered. Once it became obvious that the vast majority of dot.com start-ups didn't have a viable business plan, prices went through the floor.
That catch-phrase - "this time, it is different" - has staying power. It still rings in my ears. And when I look at the last five years of UK GDP numbers, it seems to have a resonance. Something is very different this time around. The post-Lehman down-turn has lasted longer than any other recession over the last 100 years. It is also the deepest recession the UK has experienced; deeper even that the great depression of 1929.
The UK economy is again shrinking. In real terms, the GDP during the first quarter of this year was about 4 percent lower than in 2008. The economy is about 12 percent below the level implied by historical trend growth rates.
Policy makers are out of ideas. Huge fiscal deficits, and quantitative easing have failed to restore growth. Actually, it is worse than that. We have failed to make any progress towards resolving the underlying causes of the crisis. Public and private debt levels remain at historically unprecedented levels. Nothing has been done about entitlement spending. The economy remains smothered in poverty-friendly regulations.
How did we get into such a mess?