When will the depression come to an end? There are plenty of forecasts out there. Maybe the Olympics will lift the economy next summer. Perhaps the euro crisis will finally be resolved after Christmas. The emerging markets might grow fast enough to dig us all out of trouble.
All of them are way too optimistic. This will carry on until 2031.
For my new book, The Long Depression: The Slump of 2008 to 2031, I've been researching what economic historians refer to as the long depression of the 19th century. It started with an almighty crash on the Vienna stock exchange in 1873, and lasted until 1896, an epic 23 years.
Could we be witnessing another two-decade slump? Unfortunately so. The UK is already experiencing its longest depression since records began -- this downturn has already lasted longer than the slump of the 1930s. Europe is heading for a deep depression next year as the austerity regime bites. The U.S. will struggle to grow significantly. We are used to short, sharp recessions. But it is now nearly four years on from the credit crunch. And things are getting worse, not better.
We have been misled by comparisons with the 1930s -- a terrible depression, but one that was over quite quickly. The long depression of the 19th century came after an epic financial bubble, and had its roots not just in speculation, but in a currency crisis, and the arrival of a massive new industrial power -- the U.S. was disrupting the global economy then as China is now.
And today? We are going through something very similar. In truth, the developed world is facing not one crisis, but three.
There is a debt crisis. The developed world has been building up debts on a spectacularly scale over three decades. In the UK, total debts, adding up what individuals, companies and corporations owe, have reached a towering 450 percent of GDP. According to McKinsey data, global debt now stands at $158 trillion; that is up from $77 trillion in 2000. Put another way, global debt amounts to 266 percent of global GDP now, compared with 216 percent a decade ago. Debt on that scale is unsustainable.
Then there is a currency crisis. For most of the post-war period, the dollar was the anchor of the global economic system. That worked when the U.S. was the overwhelmingly dominant economy. It doesn't work anymore. The dollar is now down to 60 percent of reserves as central banks diversify away from a currency falling in value. At some point we will come up with a new core currency -- perhaps the Chinese renminbi, perhaps gold. But until we do, there will be more chaos ahead.
And finally there is the euro, perhaps the most dysfunctional monetary system ever created. Welding together the currencies of 17 very different economies, without any kind of fiscal union to compensate for the differences between them, was always a high risk experiment. We can by now surely agree that it has failed. The euro was meant to promote faster growth and greater stability. It has become instead a cause of depression and volatility. Until it is dismembered, there is little chance of the economy returning to stability.
None of those tasks can be accomplished easily. The euro will take several years to take apart, and if it falls apart, and chaotically will plunge the world into a deep depression. A replacement for the dollar will take a decade to establish itself. And only once those are achieved can we start paying our debt down to manageable levels.
The great 19th century depression lasted for more than two decades. The 21st century equivalent won't necessarily last quite so long -- but it isn't going to be over soon.