Desperately Seeking Analogies

In his Op-Ed piece today titled "Who'll Stop the Pain?" (http://www.nytimes.com/2009/02/20/opinion/20krugman.html?_r=1) Paul Krugman sought historical analogies to the current recession in search of a way out.

He correctly pointed out: "this isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s." He went on to explain that "your father's recession" in 1981-1982 began and ended with the Federal Reserve in response to runaway inflation at the time. The current recession, he also correctly stated, was more like "your grandfather's Great Depression" -- the product stock market bubble bursting and a credit boom gone bust, with the Fed virtually powerless to end it.

Then he vainly sought a 19th century "great-great-grandfather's" analogy in the Panic of 1873. Nope. That panic was a walk in the park compared to the double whammy of the multi-year panics beginning in 1837 and 1857, respectively. These two panics are the direct analogs of the two crashes that occurred during the Great Depression beginning in 1929 and 1937, and the two recent crashes in beginning in 2000 and 2007, respectively. They come in twos, after periods of growth, euphoria and soaring stock prices induced by what I call Megacycles -- transformations of the human enterprise brought about by new combinations of technology and energy.

The 19th century Megacycle was the Industrial Revolution (mechanical technology/coal energy), the 20th century Megacycle was what I call the "Petro-Industrial Revolution," (electro-mechanical technology/oil and gas energy) and the current Megacycle, beginning in the late 1980s is the Electronic Revolution, which has yet to witness the replacement of oil and gas as prime movers by a new form of energy (ultimately, I'm guessing, hydrogen fusion atomic power).

I have been lecturing and writing about Megacycles for many years; and the understanding of this model led me to predict both the crash of 2000 and 2007 long before they happened and also provides the insight to answer Krugman's question: "Who'll stop the pain?"

The pain is the product of inevitable over-extension of credit during the initial euphoric growth phase of a Megacycle, when entrepreneurs, investors and lenders are overly excited by the seemingly endless possibilities of new technologies and sources of energy. The pain starts when these inflated expectations and accompanying asset bubbles collide with reality, bubbles burst and the economy shrinks throwing many out of work. The pain ends when excessive debt is wiped out either by newfound frugality, increased exports and diminished imports (implying devaluation of the dollar), asset sales to and conversion of debt to equity by foreigners or default. In short, the history of Megacycles tells us deleveraging ends the pain.

In the present instance, the Megacycle remains incomplete, stuck with the old form of energy -- hydrocarbons -- much of which happens to be controlled by highly unstable, unfriendly folks. This accident of geology complicates the problem immeasurably, and provides the second answer to Krugman's question: the pain also won't end until we replace hydrocarbons with alternative sources of energy, thereby achieving energy independence.

Just imagine a world in which the U.S. is virtually debt-free and energy independent. No pain. These should be the ultimate objectives of U.S. economic and energy policy.

To view my PowerPoint presentation "Megacycles" visit www.cassandra-chronicles.com and scroll down to near the bottom, just before the subscription page and click on the link.