David Malpass with a typically cogent column on the crisis of lost capital and plunging consumption, but also the more important factors that drive the future.
Losses in U.S. wealth and self-confidence have been massive, with job conditions still worsening. But a long downtrend into 2010 isn’t inevitable, even assuming a systematic lurch to bigger government. A starting point for optimism is to realize that the creation of new capital is more important than the loss of old capital. This is hard to absorb emotionally during a crisis. The world’s past wealth creation is outstripped every generation by innovation, human progress and the rapid growth of the above-subsistence population.
Consumption may also prove less important to the recovery than asserted in the warnings of another Great Depression. Consumption crashed after theLehman Brothers bankruptcy. With consumption equaling 70% of GDP, a downsizing there would decimate GDP if the economy were static. Yet GDP itself means production, not consumption. A lot of U.S. consumption has been idle or is sourced abroad and won’t be missed. The GDP issue is whether the Crash of ’08 will cause people to work fewer years, less hard or less productively. That’s unlikely.
Even for those deeply worried about old capital and weak consumption there are grounds for optimism. So far most of the banking sector losses have been accounting writedowns, not cash losses. Layoffs would slow and consumption resume if the Fed sped its asset purchases and Washington stopped imposing arbitrarily low prices on equity holders and regulatory capital in the blind assumption that crisis markets are accurately priced.
