R2-D2: Recession to Depression II

R2-D2 is unfortunately not about the much loved robot in Star Wars.

In light of the current worldwide economic situation, like most people I know, I have been thinking through the various socio economic scenarios at the global, local, company, and of-course the personal level. One likely scenario is that the current severe recession will in time be called a Depression and possibly the Second Great Depression. The straw that could break the camel's back leading to a full blown depression could be the blowing up of the already brewing currency crisis. When my analysis of the current economic situation took me to the issue of currency, one chain of thought took me down the following process: Currency is one of the “evolution mechanisms” the human species adapted in order to increase the chance of species survival, because currency enables humans to move their wealth and in a way adapt to different environments easily, much like what Darwin talked about 200 years ago. So I googled the term ‘currency Darwinism’ and got about 1.8M hits and at least about 10 articles that in some way talked about the currency as a species differentiator. So once again I am writing about ideas that have been pursued by writers before me.

The current misuse of currency is putting us at risk. Not risk of extermination of species, but at risk of conducting global trade, risk of free flow of ideas, risk of slowing progress in science and technology. I say "misuse of currency" based on the tendency of countries to print more notes when they need money. So you need a couple of Trillion dollars to pull through this crisis, what do you do, you print notes (it doesn’t matter how you package it as debt, bill, bonds, …..). All this printing of notes of little or no value will eventually lead to a crisis. Today we ask the question “how could any body have been so stupid to lend to ‘sub prime’ borrowers and then expect to minimize the risk by securitizing the collective ‘sub prime debt’?”. There is a good chance that about 24 months down we could ask a similar question about currency valuation.

Traditionally the countries or regions that had strong currencies and easily convertible currencies, with fairly open markets and capitalist leanings were the ones that progressed the fastest. Over the last three or four decades most major currencies were delinked from gold. The valuation of currencies was linked in a web of intangible values or models. The artificial strengthening of the US dollar and the disinclination of other countries to weaken the dollar and strengthen their own currencies will deepen the current problems. The perturbations provided by the central banks to the economic system may or may not work, but will surely give rise to a lot of opportunities and some fairly grave consequences. Our endeavours should be aimed at growing the opportunities and reducing the grave consequences.