Recession, Depression, and Financial Crisis: Everything Economists Want to Know But Are Afraid to Ask

Once again the economic experts are telling us that the current (October 2008) financial “crisis” will lead to a deep recession or depression. The financial press is even claiming that we are headed for “global meltdown”. Heard it all before? The last time was in 1998 when we were told that the financial difficulties in the East would generate the “East Asian meltdown”, which would last for at least a decade and would generate a “global economic crisis”. The economic summit called by President Bush for later in 2008 is reminiscent of the G7 and G22 meetings called to discuss similar issues in 1998. And yet nothing happened. Of course the financial gurus, such as Alan Greenspan were quick to claim the credit, but the truth is that financial crises are supply-side happenings that generate a lot of excitement among the stock market speculators but have little real-world fallout as long as the dynamic strategies being pursued by the world’s leading societies are viable. The stock market crash of 1987 is another case in point: nothing serious happened in the real economy. Depressions only occur when dominant dynamic strategies are finally exhausted and new ones are slow to emerge: as happened in the USA during the 1920s and 1930s. The conventional wisdom among the orthodox economic fraternity, that the Great Depression was the outcome of the 1929 Wall Street crash, is totally incorrect. Economists and their political masters will only understand the relationship between recession, depression, and financial crisis, when they have developed a realist general dynamic theory of human society. Until then, economic policy will be confused, ineffective, and distorting. A general dynamic theory is presented in this paper and used to analyse financial crises and economic downturns. To the degree that the real global economy is in trouble, it is due not to financial mismanagement, but to the misconceived policy of inflation targeting pursued for the past decade or so. Once again, our compulsion to intervene exceeds our capacity to understand the implications of our actions.