By He Jun*
Under the framework of old school economics, “an economy in the world is immune to recession” is almost a myth. As long as the economics of human development and structure are still valid, the economic cycle is still functioning, the market remains systematically fluctuated and human nature still possess flaws, it would be impossible for any economy to be recession-proof.
Take the United States as an example. Since 1973, the U.S. had experienced six classic cases of economy recession, each lasted between 6 to 18 months and the country suffered a negative economic growth ranging from -0.3% to -5.1%. From 1893 to 1934, the U.S. experienced 6 great depressions, each lasted between 13 to 43 months, and suffered a negative economic growth ranging from -14.7% to -38.1%.
In recent decades, the Chinese economy also experienced several recessions. ANBOUND’s research shows since the 1960s, China economy at least underwent 6 major recessions. In 2019, the Chinese economy displayed a new norm of “derailment”, and many economic phenomena appeared to be in the process of “recession”.
However, the recent report published by the investment bank Goldman Sachs claimed that the U.S. economy is no longer structurally inclined to the recession, and is nearly recession-proof. U.S. Federal Reserve Chairman Jerome Powell stated on October 19 last year that economic recession is the by-product of economic prosperity, but since no sectors of the U.S. economy were particularly prosperous, he did not consider that the past decade of the U.S. economic expansion has to give away to the economic recession. According to Powell, the U.S. economic recession during the 2007-2009 was triggered by the real estate bubbles during the 2000s.
Still, Goldman Sachs identified the U.S. economy to have 5 potential risks: industrial shocks and inventory imbalances; oil shocks; inflationary overheating that leads to aggressive rate hikes; financial imbalances and asset price crashes; and fiscal tightening. According to the analysis of Goldman Sachs, these 5 risks are mostly mild. Goldman Sachs also believes that the backbone of “Great Moderation” (low levels of fluctuation marked by sustainable growth and moderate inflation), first started from the 1980s and only interrupted by financial crisis decade ago, is still intact. Economists from Goldman Sachs stated that the current economy is not structurally prone to a recession; although new risk might emerge, for now the main indicators of recent past recession like crude oil shock, overheating inflation, financial imbalance and others, do not seem to be worrisome.
ANBOUND’s researchers believe that it is difficult to determine Goldman Sachs’s “U.S. economy is nearly recession-proof” assertion as a longer period of observation time frame is required. Still, the phenomenon they pointed out is the problem that needs to be addressed. To cover the previous bubble burst with a larger bubble, central banks around the world responded by launching their extremely loose monetary policies, but has this measure changes the economic form and system? In an over-urbanized and highly information-based society, will excessive capital become a norm of the world economy?
ANBOUND think tank’s scholar Chan Kung proposed the “crisis triangle” model, believes over-urbanization can lead to excessive capital, which is the most overt characteristic of the current global market. The “crisis triangle” is consisted of “urbanization- excessive capital-economic and financial crisis”, and is important factors that affect or even controls economy (for details, see “Urbanization Subvert the World”, Chan Kung, September 2015). As the “crisis triangle” model suggests, excessive capital not only is the critical watershed in theoretical understanding but also the important cause of over-production. In a world of over-production, excessive capital will not appear as inflation, but as debts and inventory. Besides, excessive capital will also manifest as the rising price of financial assets (such as rising stock price).
According to some of ANBOUND’s researchers, the reason that the U.S. economy recovered the fastest after the financial crisis, and behaved what Goldman Sachs believes to be “near recession-proof economy”, is related to its economic structure. Compares with other countries, the U.S. economy has highly capitalized, not only their capital market and the financial sector is highly developed, many of their industries are closely related to capital as well. In this case, the excessive capital situation largely maintains the prosperity of the U.S market. Even under the bubble-backed prosperity, before the next bubble burst crisis takes place, the U.S. can appear as “recession-proof”.
Final analysis conclusion:
The U.S economy is unlikely to be completely recession-proof, but the U.S possesses unique position and economic structure in the world of excessive capital. On one hand this allows it to enjoy the benefits of the excessive capital bubble to the fullest extent, and on other hand it supports the continuous growth of the American economy.
*He Jun is a master in the Institute for the History of Natural Sciences, Chinese Academy of Sciences, majoring in intellectual history of science and is a senior researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.