Back in the downwave.

Alison Marshall, January 2012. [with later additions in square brackets.]

A k-wave downturn, driven by demographic change, may be a factor in the global financial crisis. Other factors are Chinese exports, American mortgage law, and financial deregulation.

The Chinese problem is part of a long term transition away from the dominance of Europe and the US. The other three are related to the longwave crises which tend to occur once in every 1.7 generations.

The US mortgage law was a response to the crisis of the 1930s, the dominance of the New Right deregulators came after the crisis of the 1970s, and now in the 2010s, here we are again, in another longwave downturn.

US mortgages.

1. Michael Robinson, 29 July 2008.

With the American housing market in its worst crisis since the Great Depression of the 1930s . . . a little known quirk of US law threatens to drive down house prices even faster. . . In California and much of the rest of America, there is a powerful incentive for homeowners . . . to walk away from their mortgage obligations. Though banks can repossess and sell the homes of borrowers who stop paying their mortgages, under a legal quirk originating in the Great Depression of the 1930s, banks cannot easily pursue borrowers for any balance outstanding on the main mortgage on their homes. . . “The dangers are extraordinary,” Professor Wachter says. “If all that is needed is that the house value is less than the mortgage value, there is a large number of homeowners in the United States who are in that situation”.

[2. Can’t pay or won’t pay?
The Economist, 21 February 2009.

No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. . . Is it that homeowners cannot afford to pay; or is it that they are declining to do so, because their homes are now worth less than their mortgages, the phenomenon known as negative equity?

Both factors play a part, but economists are divided on their relative importance. . . a Federal Reserve Bank of Boston study that found that when home prices fell 23% in Massachusetts between 1988 and 1993, only 6.4% of borrowers with negative equity ended up in foreclosure. . . Edward Pinto, an independent financial industry consultant, estimates that 20% of borrowers with negative equity went to foreclosure in the past three years, in part because they started out much less creditworthy than their counterparts in Massachusetts two decades ago.]

3. Spanish activists find new target.
Giles Tremlett, The Guardian, 17 June 2011.

Spain’s peaceful “indignant” protest movement, which saw its image tarnished by outbursts of violence in Barcelona this week, has turned its attention to stopping banks from repossessing people’s homes. . . Campaigners want Spanish law changed so mortgage debts can be cleared simply by giving banks the keys to the property – as they are in the US.

4. Michael Burke, The Guardian, 18 July 2011.

Unlike US banks, EU bank weakness is not primarily driven by the souring of domestic property loans. Instead, it was their exposure to falling US markets that caused the first real problems . . . this was exacerbated by the US dollar losing a quarter of its value from 2006 to mid-2008.

Chinese exports.

1. Stephen Foley, 12 November 2008. G20 summit: New world order?

. . . there is little agreement yet on . . . what type of financial architecture, if it had been in place, would have prevented a housing downturn in the US from becoming a credit crisis that engulfed the world. . .

. . . Economists identify big capital flows and leverage as two major contributors to the credit crisis, the first for pumping giant surpluses from China into the US and inflating a housing market bubble . . . the second for allowing banks to make bets many times the size of their underlying assets.

2. Ashley Seager, The Guardian, Wednesday 20 January 2010.
Beware global economic imbalances, Mervyn King warns.

. . . “The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not.”

King has long warned about the need to address the fact that some countries such as . . . America and Britain have run huge trade deficits for years while China and Japan, among others, ran big surpluses. The capital flows from reinvestment of the surpluses in western markets led to the excessive risk-taking by banks that threatened the global financial system. . .

3. David Pilling and Christian Oliver, Financial Times, 29 October 2010.
Lee optimistic G20 will agree measures on trade imbalances.

Lee Myung-bak, South Korea’s president . . . said the G20’s broad rules to prevent currency and trade conflict did not mean that nations should be denied leeway to act unilaterally on controlling capital flows.

. . . South Korea’s central bank this week floated the possibility of introducing restrictions aimed at cooling what it sees as destabilising investment flows. But Mr. Lee said these should not be seen as “capital controls”. They should be called “macroprudential policies” under the umbrella of the G20, he said . . .

Brazil, Indonesia and Thailand have sought to limit the disruptive effect of inflows, but Mr Lee suggested their attempts to tweak regulations fell within the scope of acceptable unilateral action. “I won’t define any country’s measures as capital controls,” he said.

. . . Mr Lee declined to define what the limits to unilateral action might be.

4. Overheating East to falter before the bankrupt West recovers.
Ambrose Evans-Pritchard, 03 Jan 2011.

. . . The East-West trade and capital imbalances that lay behind the Great Recession are as toxic as ever. Surplus states are still exporting excess capacity with rigged currencies — the yuan-dollar peg for China and, more subtly, the D-Mark-Latin peg within EMU for Germany.

. . . the Atlanta Fed’s law is that every year of debt-based boom is roughly offset by equal years of debt-purge bust . . .

[5. Financial Times, 13 December 2012.

In the early half of the past decade, inflation targeting made central banks reluctant to accommodate the deflationary effects of China’s entry into the world trading system. The excessive liquidity they created fed the credit bubble.]


1. Geoff Chapple, NZ Listener, 23 May 1981.

John Maynard Keynes . . . discredited monetary policy as an instrument of economic control. . . Under Keynesian theory, fiscal policy – variation in the rates of government taxation and spending – became the key tool for maintaining economic stability.

. . . Government was thus granted an essential role in the economic well-being of a capitalist economy. By giving it that status Keynes contradicted another old idea of western economies – that the privately-owned industries of an economy, operating in a free market situation, will call out the full employment of resources in an economy.

. . . These old ideas have been invested with a new power by the apparent failure of Keynesian policies. The economic problem now is of a new type – high inflation accompanied by low, or even as in New Zealand’s case, negative growth, and an unemployment problem of a size not seen since the Depression.

2. Current global banking crisis was predicted by 1993 academic study.
30 September 2008

. . . the current international turmoil in banking was accurately predicted some fifteen years ago . . . by an eminent Southampton economist and lawyer. . . his book . . . concluded that, by permitting banks to engage freely in securities markets, policy-makers were engaging in a vast banking experiment whose outcome would be “increasing potential for a self-feeding and large-scale crisis engulfing both banks and securities markets internationally”.

Professor Dale specifically warned against repeal of the US Glass-Steagall Act that separated banking from securities business: “The Act was repealed in 1999 and eight years later the banking industry is facing a meltdown due to its risk exposures in securities markets,” he comments.

3. Sam Coates and David Robertson, The Times, 26 January 2012.

. . . a new report on globalisation, from the Institute for Public Policy Research . . . by Will Straw and Alex Glennie, says that Britain and the US believed in the Eighties, Nineties and early part of the first decade of this century that economic policy should concentrate on liberalisation, deregulation and privatisation. But it says: “Inequality within countries rose rapidly as rewards became increasingly concentrated on those at the top.”

[4. Margareta Pagano, The Independent, 26 September 2012.

. . . the big issue in Britain has been the chronic lack of funding for small and medium-sized enterprises (SMEs); riskier capital for start-ups through to medium-term lending. The shortage was first highlighted by the Macmillan committee – including Ernest Bevin and John Maynard Keynes – set up in 1929 after the stockmarket crash to look at ways of improving finance for industry.

Even then, the committee pointed out that our bankers were failing industry. It’s where the phrase the Macmillan Gap comes from, and out of it grew the Industrial and Commercial Finance Corporation (ICFC), set up with £15m in 1945 as a joint venture by the Bank of England and the UK’s biggest banks to provide long-term equity investment funding . . . for SMEs.

The ICFC became the biggest provider of growth capital for unquoted companies during the 1950s and 1960s, and by the 1980s had become the leading source of finance for management buyouts . . . it then made the mistake of floating on the stock market . . . and forgot to mind the gap.]

Long waves.

[1. Brittan on Britain, The Financial Times, 28 March 2014.

The . . . pound was devalued in the autumn of 1967. . . inflation came back into the headlines. Most economists expected a temporary bulge after the 1967 devaluation. But its refusal to reverse came as a shock.

. . . Labour prime minister James Callaghan . . . in a 1976 speech . . . disowned the idea that governments could spend their way into full employment in the face of overbidding by the unions – a speech cited to death by Conservative leaders.]

Accessed March 2015.

The stagflation of the 1970s, including Richard Nixon’s imposition of wage and price controls on August 15, 1971, and in 1972 unilaterally cancelling the Bretton Woods system and ceasing the direct convertibility of the United States dollar to gold, as well as the 1973 oil crisis and the recession that followed . . . called into question . . . Keynesian macroeconomic policy making and . . . the effectiveness of government intervention in the economy.]

3. Time, 16 February 1987.

According to the U.S. Development Council this year, “some experts believe the economic climate is about to turn propitious for welfare reform. The competition for jobs that resulted when the baby boom generation reached working age is a thing of the past. In the 1990s fewer people – those born during the baby bust, the period of low birth rates that began in 1965 – will be looking for jobs.”

4. Kathryn Hopkins, Robert Lear, and Sam Fleming, The Times, 26 January 2012.

Britain is heading for the first double-dip recession since the 1970s after the economy shrank during the final three months of last year.

5. Bill Jamieson, Scotland on Sunday, 29 January 2012.

. . . it now appears we are mired in a recession/recovery aftermath longer even than the 1930s Great Depression. . . a better comparison may be with an earlier great depression which stretched from 1873 to 1896. . . a general, long-lasting economic malaise similar to what we are now experiencing.

6. Couples and the K-wave.
Alison Marshall,  March 2008.
A marriage squeeze is a problem of unbalanced supply and demand in the marriage market.  An example is Britain in the 1920s. It’s well known that for many British women at that time it was difficult to find husbands, because so many British men had been killed in the 1914-1918 war. . . But a similar problem in the 1970s was not widely recognised.  Men tend to be slightly older than women when they marry, and for baby-boom women there weren’t enough slightly older men.

. . . Would polygamy be better? I don’t think so. If men could have multiple wives, there would be surplus men instead of surplus women. In general there would be more dissatisfied unpartnered people in a polygamous society than in a monogamous one.

. . . The influences on the numbers of births in this model are the number of potential mothers and the severity of the marriage or mating squeeze. A cyclical minimum occurs in the numbers of births when the mothers are women who were born about two-fifths of the way through the cycle from the previous minimum, after the steepest increase in the birth rate but before the cyclical maximum in the numbers of births. The cycle is completed when these women reproduce, and so the time taken for a generation to replace itself is three-fifths of a cycle. The cycle length is therefore 5/3 or 1.7 generations.

. . . Economic conditions also seem to vary in long waves with wavelengths longer than one generation. These cycles have been related to fertility by R.A. Easterlin, Edward Cheung, and others, and to investment, innovation, and war by K-wave theorists. . . Cheung’s book “begins by examining the population growth rates of the United States and Canada from 1789 to the present. . . changes in population growth have created recurring themes in history. . . shifts in expenditures and lifestyles of Baby Boomers caused shifts in aggregate demand, producing the long-wave economic cycle.”

Further reading.

The search for a stable economy,
Welfare reform for the 21st century,


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