So, it’s really happening. Eight years after the West was plunged into recession and began to climb out of it — slowly, very slowly — a fresh dumper is heading towards us all. It’s happening raggedly, but it’s happening — starting with a sharemarket sell-off, the most visible manifestation of a global lack of confidence, itself being fuelled by a lack of demand.

The lack of demand never went away. We never climbed out of the global recession; the hole it created was simply plugged with infrastructure spending. Part of the reason the recession was extended and deepened was a refusal to commit to this earlier — a product of Republican and right-wing Democrat refuseniks in the US, Tory austerity politics in the UK, EU pro-northern policies in Europe, and a half-hearted nature of the reversal that followed it. Australia sailed through as the great counter-example — allegedly — the place that showed you could avoid a recession if you plugged the demand gap absolutely and without hesitation.

Whether that’s true or not is starting to look a little irrelevant. The West is now facing a whole series of new conditions that will prompt recession, on top of the financial system mayhem that triggered the last one and the deep inequality that produced it. China is undergoing a managed slowdown, a political strategy designed to reverse the degree of heightening, and dangerous, tensions — between city and country, poor and the new middle class — that threaten Communist Party power.

The managed slowdown has inevitably produced a collapse of confidence in markets, but that effect is being taken as cause — especially by neoliberals, who would like to attribute it to China’s failure to introduce a more property-friendly legal regime, aka “the rule of law”, like, uh, the US (because it has avoided recession so absolutely).

The US itself is engaged in some politics disguised as economics, with the recent Fed interest rate hike by 0.25%. The official reason is stop the economy “overheating”, but the US economy is about as sizzling as a pie in a warmer at 7-Eleven. What could the real reason be for this hike, and the predicted two or three to follow? It’s so when another recession fully hits, the Fed and the government will have something they can be seen to be doing. It’s an acceptance that this tepid, low-growth, low-reward economy is the new normal, the baseline to which we will be adjusted back.

The final part of all this is the steady fall in the oil price. More politics as economics: Saudi Arabia’s attempt to deprive Iran of funds, now that its oil is back on the market, and to blow a hole in the US’ drive towards fossil fuel independence through shale oil and gas. The global effect of an oil price fall should be a boom in import-dependent economies. That that isn’t occurring is a clue to another reason for a low oil price: a lack of global demand for it, a sign the recession is already well and truly here.

In Australia, we are being hit by all these things at once: China and India don’t want as much of our coal as we would like them to take; coal-seam gas for export isn’t competitive when the good oil is still flowing cheap; confidence in our markets tremors whenever US and European markets do; and we still have the debt and deficit from dealing with the last recession to deal with.

Deeper than that, we have the problem that we have used the boom of the last 20 years to run a parallel consumer boom, which has kept the whirligig going. That has had several effects: 1) low taxes, so no funds for real investment in education, health and infrastructure, all the things we would need for the next economy, 2) a set of expectations about wage levels, and the amount of consumption one can actually do — a new Australian “way of life”, now unsustainable, and 3) our economy is horribly inflated, but tolerance of high prices has become part of (2). Inflation has also been “stored” in things like the housing bubble, and systemic under-building, so people won”t notice that they’re working twice as hard to pay for the same space and amenity as their parents had.

This situation — having been better off than everyone, we may soon be worse off — will determine our politics, and one suspects we may be coming to a pretty quick end to the extended silly season of Australian political life in that regard. We’ve had a kind of transitional period in the past few months, one in which discussion of the substantial problems we face has been done in the manner of silly season — as per the guff about innovation, as if a sheer act of will could overcome decades of underinvestment, a less than intense entrepreneurial culture, and sheer economies of scale and concentrations of capital. More recently, we’ve been told not to worry about export or industrial production at all. Household spending will simply take up the slack, and we will all float upwards forever. Sounds right.

The political baubles will go, over the next six months, to anyone willing to talk about this approaching dilemma in an adult and clear-sighted manner. Turnbull has so far failed that test. But he took over at the fag-end of a year, and he would be a surer bet than Bill Shorten’s Labor to be able to make political capital from the crisis of demand. The approaching recession would be a boon for a Labor party with a smart, responsive, agile (drink!) leadership. Anyone know where one of those can be found, at a price affordable even with our plunging dollar?

Peter Fray

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Peter Fray
Editor-in-chief of Crikey