Judging by the dominant trend in the media, the United States, and with it the rest of the world, are plunging into a depression comparable to the one experienced in 1929. One popular American news magazine has put on its cover a picture of President-elect Barack Obama disguised as Franklin D Roosevelt, the leader who, for mysterious reasons, is credited for having brought the US, and the world out of the depression.
The message is clear: what we are in a depression and Obama is our Roosevelt. Thus we are asked to believe that history repeats itself.
A closer look at facts, however, may provide a different picture.
Despite all the talk of depression, the US economy, and with it the global economic situation, appear to be in much better health than they were a quarter of a century ago, let alone at the start of the 1929 depression.
In 1980 as Jimmy Carter was vacating the White House, the Dow Jones index of shares on the New York Stock Exchange stood at around 700. Last year the same index reached almost 14000 before falling steadily to its current average of 8000, still more than 11 times higher than in the last year of Jimmy Carter.
Inflation has jumped to just over three per cent and might
reach four per cent by early next years, largely because of the high oil prices of the past 30 months or so. Under Carter, inflation stood at an average annual rate of 17 per cent. Unemployment, now hovering around six per cent in the industrialise nations, stood at 11 per cent in 1980, with some countries, like France and Italy, suffering even higher rates. Interest rates danced around and average or 17 per cent in those supposedly “good old days”. Today, however, they are down to one per cent in the US, three per cent in the Eurozone and zero per cent in Japan. In 1980 average mortgage interest for homebuyers in the industrial world was around 21 per cent. Today, it is down to around six percent, and, in the US, just four per cent.
Well, you might say, we may not be in a depression but we are certainly passing through a recession. May be, maybe not. The academic definition of a recession is that of two successive quarters showing negative growth. So far this has not been the case in the United States and the United Kingdom. The Eurozone countries have declared a collective recession. However, even in this case the picture is not uniform. France is singled out as one of two Eurozone nations not to be in recession. (The other is Spain.)
So, how did France achieve this “miracle”? The figures show that the French economy grew by the equivalent of less than 600 million euros in 2007. That is the equivalent of one cup of espresso for French coffee drinkers each day. Had the Italians and the Germans drunk one extra cup of coffee each day during 2007, they too might have had avoided the dreaded recession we are supposed to fear.
The problem with economics is that although it uses the tools of scientific analysis it cannot apply its conclusions in controlled laboratory conditions. Here, the rational and the irrational often dance together. However the irrational is not the opposite of the rational; rather it belongs to an entirely different category. Economists of all persuasion know the famous dictum that economics is the only science in which the mouth does feel sweet simply by pronouncing the world “halva”.
The opposite is also true. By constantly promising doom and gloom, we end up creating a sense of anxiety that affects out decisions. That sense of anxiety, in turn, guides most people towards excessive prudence. As a result, many of them stop ordering that extra cup of espresso. And, by doing so, they rob the French economy of the little edge that prevents it from falling into recession.
Afraid of being caught without resources on a rainy day, more and more people start saving and recycling rather than spending and investing. That, in turn, creates the very rainy day that they had hoped to avoid. History shows that civilisations that save and recycle too much are as doomed as those the most profligate. It is quite possible that the Sumerians disappeared as a civilisation because they saved and recycled too much. In contrast, Rome collapsed as an empire because it spent its way to bankruptcy.
Against the current backdrop of doom and gloom, the sight of a new super-luxury hotel opening in Dubai the other day with a party costing $25 million may seem bizarre not to say indecent, especially with suites costing up to $40,000 a night.
Most of us may never check into a hotel like that, especially if we shy away from ostentation. But the fact that there are people willing to sink so much money in what looks like the quintessential white elephant may be good news. It is a symbol of hope- hope of making money sometime in the future.
Capitalism, of course, is the ideology of hope: hope that enough people will buy your new product or service, and hope that enough people will postpone their consumptions so that they could give you enough money to continue producing and offerings goods and services.
The enemy if capitalism is not Communism, or any of the numerous other ideologies that have challenged it for centuries. The enemy of capitalism is pessimism, something now churned out by much of the global media on an almost hourly basis.
Pessimism is a formidable foe, even for an ideology of hope. The battle is exciting to watch. So, why not order that extra cup of espresso?