It is Not a Recession!
By Prof. Shlomo Maital and Yoram Yahav

No, it is not a recession. It is a global paradigm shift.  

For political leaders, managers, investors and working people, there is a huge difference. 

We believe that this key point is at present not understood. Businesses and government policy are guided on the assumption that we are experiencing a downturn, a business cycle, like many others in the past, one that perhaps is a bit more severe, and one that will pass. 

This is wrong. If businesses and policy continue to build on this wrong assumption, Israel's economy will be in deep hot water. 

A business cycle is a decline in GDP, lasting about a year, accompanied by rising unemployment, followed by a recovery, led by consumer spending. The global 'rules of the game' remain unchanged. 

We had such a downturn in 2001-3. For Israel, it was quite serious. Many high-tech companies saw their share prices drop by 75% or more. Many companies now seem to assume that the current crisis is just another chapter of the same flavor.

But it is not. Here is why. Entire industries are facing collapse and radical change. Financial services, for example. Investment banks are now becoming bank holding companies, subject to tougher regulations. Hedge funds are disappearing. Venture capital funds are drying up and closing. This key industry must be rebuilt under new rules; and when it is it will look utterly different.   

Consumer electronics, too. AU Optronics, the world's 3rd largest flat panel display producer, based in Taiwan, had factories that worked at 100% capacity 6 months ago. Today they are at 60% and the Chair of the company reports that markets are “frozen.” That 60% will drop to 40% soon, or even less. The consumer electronics industry itself recently had its annual convention and trade show; industry leaders projected 'flat' sales in 2009, at $171 b. They are delusional. Sales will decline sharply. They are in denial. Many of the weaker companies will disappear, as will the companies that make the products they sell.

Restaurants are closing right and left. Retail outlets are closing. Small businesses are failing. In past recessions, most business failures occurred during the recovery, when companies that failed to manage the downturn well, found they could not compete. In this crisis, companies are going broke during it, in part because they cannot get credit. Banks have money but do not lend it, because they need the money to shore up their depleted capital. Central Banks can push money into the system as much as they wish, but they cannot force banks to lend it.

Economists are helpless. If excessive monetary expansion got us into this mess, how can we get out of it by creating more money? If people are hopelessly in debt already, how can we urge them to spend more? If governments create huge deficits, then borrow money to pay for it, they will take away scarce credit from businesses. Is that smart? If governments create huge deficits financed by printing money, they will pour more fuel onto the fire of excessive money expansion. If deficits soar, our confidence in government shrinks, and lack of confidence itself is the core problem, so the problem worsens.

We have painted ourselves into a corner. And worse, our leaders seem blissfully unaware. Israel's Finance Ministry is still in a cut-the-deficit mode, a mindset useful for good times but disastrous in bad times. The Bank of Israel is largely helpless, able only to exhort banks to lend but nothing more than that. 

Globally, world capital and goods markets need a stable currency for them to operate. The world's money is still the dollar -- 80% of all transactions in foreign exchange involve dollars. But the dollar is weak and will get weaker. How can we have a global economy without a stable global money? What currency will replace the dollar?

There are no answers, because we have global economics, as Henry Kissinger said, but local politics. Each country is trying to save its own skin, sometimes by damaging other countries (through tariffs, or currency devaluation, which is what made the Great Depression last a whole decade). We need global policy coordination. But we have none. 

This is not a recession. It is a paradigm shift. A new world system will emerge. When? How long will it take? How much human suffering will result? For how many years?

True optimism is based on cold realism. Only if we face the facts, can we -- as managers, investors, working people, heads of families -- act wisely. Only if our political leaders face the facts will they act decisively and wisely. 

As long as we believe we are having a recession, this will not happen.