As surely as night follows day, credit crunches are followed by recessions, if not great depressions. Whether we are on the verge of a 21st century version of the 1930s, however, still remains to be seen.
But the possibility or even the probability of that happening should not be rejected out of hand. For the global jungle is a far from benign place, and there are rules and dynamics operating in there that the world of 70-odd years ago did not need to worry about.
For one, there is the question of poverty in affluence. This is the issue of the working poor in mature, developed econo-mies, and has even been an issue for some time in Japan, which once believed itself to be the most equal society in the world.
Japan is still the country with the largest net savings in the world. Yet in the midst of all this wealth accumulation, we have these pockets of poverty that seem to be growing larger, deeper and darker.
Poverty in affluence means that it costs a lot more to keep an economy going and to prevent recessions from becoming deeper and longer once we fall into them. When there are a lot of people out there who cannot earn a living, taxpayer money gets that much more stretched, and those who can earn a living have to work just that much harder to achieve a given rate of economic growth.
Moreover, the existence of poverty in affluence tends to make developed economies look more inward and more susceptible to protectionism.
A second feature of the current global economic condition is that recessionary momentum is starting to mount alongside very real and serious worries about inflation.
The causes of this inflation — new and old, inexorable and bizarre — are positively rampant. Demand pressures, supply constraints, excess liquidity, financial globalization, confused ideas about combating global warming by turning food into fuel — you name it. It’s all quite different from the stagflation we used to talk about in the 1970s. That was simply about price inflexibility and the wage-price spiral.
But now prices are anything but inflexible, especially where finished manufactured products are concerned, and the only wage-price spiral on display works in the downward direction.
This makes life even harder for the poor in affluent societies. Keeping body and soul together becomes a nearly miraculous task when daily food prices keep going up and your income, always assuming you have one, keeps going in the other direction.
The third point to be made about this situation is that we are lacking in heroes.
In the 1930s, for a while at least, it was American enthusiasm for free trade and open markets that worked to keep the world from falling into outright trade wars and fragmentation. U.S. motives for championing free trade were by no means entirely altruistic of course, since it was America’s increasingly huge production capacity that would benefit from open markets able to absorb its output.
Nonetheless, to the extent that stepping in to make things better is the lot of heroes, the American presence at that time was a duly heroic one.
Now Superman has gone. We don’t really need him anymore anyway. It requires much more than Superman’s simplistic confidence in his own goodness to make things better in the global jungle. What we now need is a hero much more in the mold of Don Quixote — older, sadder but infinitely more sensitive and truly altruistic.
Absent such a hero to remind us of the folly of isolationism, what follows the credit crunch may indeed become much worse than a mere recession.
Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.