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Monday, 17 June 2013

The 21st Century’s great depression: Has ‘the great reset’ in The Netherlands finally begun? Pt I

I like to look at economic recessions as a large cleansing process. Such a process is akin to a forest fire, which burns away all fallen leaves, branches, dead wood and other waste products after a certain period of growth in the forest.

When the soil in a forest is filled with combustible waste and materials, a small spark can start such a forest fire. This fire burns up all waste and excess trees and cleans up the soil for a new period of growth and prosperity in the forest. This is a violent, but necessary process for the forest, in order to maintain its health, structure and diversity.

Mostly, the impact of such a forest fire on a macro-scale is limited and it causes only moderate damage, which can be fixed easily. Nevertheless, in many cases on a micro-scale(!) even the moderate damage caused by a limited forest fire is considered to be too much to bear for certain interested people; for instance people who own a house, a farm or a company in the forest.

What often happens in such cases is that the aereal fire brigade shows up with the extinguisher helicopters and airplanes. They extinguish the fire, before it has properly burnt out. Only small quantities of forest are hit by the fire, while the rest of the forest survives unharmed. This seems the perfect solution. No fire, no damage: everything is cool, right?!


The waste and combustable materials in the forest don’t burn up in a small, low-impact forest fire, but pile up instead. As a consequence, the layer of these materials on the soil grows thicker and thicker and becomes more and more dangerous.

And then, at one doomed day, this - now massive - layer is set on fire: by a flash of lightning, an uncarefully dumped cigarette or a beer bottle glass. Or perhaps, on purpose by either a confused man or a bunch of brainless adolescents.

The fire that emerges now is feeding upon the massive layer of combustible materials, which lays on the soil. It becomes much bigger, hotter and more dangerous, as it has loads of fuel to build upon. Consequently, it gets out of control almost immediately, burning violently and unextinguishable. 

Where, during normal situations, large trees easily survive a small forest fire, now everything in the path of the fire is burnt away. Fire tornadoes, which appear during the extreme heat of a large forest fire, set everything ablaze: trees, bushes, grass, animals and people.

Eventually, the resulting damage of such a massive fire can be a multiple of what all earlier extinguished, small forest fires would have caused combinedly, when left untouched.

Sounds like the economy, right?

Since 1994, when the last small crisis emerged, the economy grew and grew and economic imbalances mounted. Trading and investing became 'too hot to ignore' and even the stately evening news in The Netherlands followed the international stock exchanges closely. 

In the 'real world' the Y2K-fear, the soaring growth of internet and e-services and the introduction of the Euro in Europe, spurred the demand for ICT-consultants to unprecedented levels. The same happened to people working in the financial and business services industries all over the world. 

If someone was not a complete fool, he was ready for a job in the ICT-services industry. And if he was even smart, he could work in the financial and business services industries.

The internet suddenly seemed the answer to all questions and the inflating bubble made everybody think that “the only way is up” for the Western economy. Recessions were a thing for misanthropes.

During 1999, after I started as a freshman ICT-consultant, I received - without asking - three  improved salary-offers... The next year ditto. On top of that, many amateur-investors made more money at the stock exchanges than during their normal daytime jobs.

Housing and commercial real estate prices in The Netherlands and anywhere else (Spain, The USA) skyrocketed. The building industry in Europe and the US had its finest hour, with so many projects in the pipeline that they really could ask whatever they wanted and still received it. People bought everything with borrowed money and the sky really seemed the limit. It was a forest fire waiting to happen…

And indeed in 2003, when the dotcom crisis broke out, it seemed that the forest was finally on fire. The mounted waste and combustable materials in the economy (excess salaries, soaring housing prices, excess commercial real estate and excess private and corporate debt) should have burned up and – after a few difficult years - the economy would have set again for a new period of prosperity.

Unfortunately, this small economic crisis was not to the liking of Alan Greenspan, the enigmaticly communicating chairman of the US Federal Reserve, and his peers in Europe, Latin-America and the Far East: they had fears for “the houses that would be hit by the forest fire” (i.e. the companies, banks, investors and people that would be hit by the emerging crisis).

Greenspan and his worldwide brigade of fire extinguishers put the small forest fire out. They did so by lowering the official interest rates to levels around 2% - 3% and by subsequently handing out almost free money to everybody and their sister. They reached their goal: the worldwide economy got a kickstart again and people with money everywhere embraced the hedonistic lifestyle, which belonged to the economic growth 'on steroids' that the Fed and its peers spurred in those days. 

People everywhere in the Western world bought bigger houses, bigger cars, bigger Swiss-made watches, more sophisticated telephones, more unnecessary household electronics and more expensive clothes and footwear. 

It was the time of conspicuous consumption: saving was seriously uncool, while collecting debt on everything was OK. Interest was historically low and risk seemed only a vague concept from a bleak past.

In a situation, where in the US even people without serious jobs and with no credit rating at all could buy a house with a skyhigh mortgage and a complimentary GM automobile on top of it, you know that “the layer of combustible material in the forest” has reached really dangerous levels. This was the case at the beginning of 2008.

The situation in Europe was slightly better in those days, but only just ‘slightly’. Also in Europe, there were bubbles of all kinds in Spain, Greece, Portugal, Ireland, Italy and also in formerly unsuspected countries, like The Netherlands.

And then the final sparks came, that set the whole forest ablaze: the subprime mortgage crisis in the USA and the subsequent bankruptcy of Lehman Brothers.

In the years since 2008, the forest fire burned the brightest and hottest in the USA: a banking crisis beyond imagination, a huge rise in unemployment, an unprecedented housing crisis and massive vacancy in the retail and commercial real estate industry were the symptoms of a forest fire, which burnt as hell.

However, these days the ‘new’ fire extinguisher Ben Bernanke and his henchmen seem to have the fire under control in the US, after five-odd years in the crisis. I do still have worries that not all combustible material has burnt away yet and that even now only the smallest spark is enough to set the forest on fire again. Nevertheless, the situation in the United States seems quite under control.

How different was the situation in The Netherlands: while the southern part of Europe had been severely struck by the emerging Euro-crisis and the soaring (youth) unemployment, the northern part of Europe and especially the powerhouses Germany and The Netherlands seemed to have everything under control.

Yes, the unemployment rose (somewhat) in The Netherlands, the housing prices went down (somewhat) and some major banks needed to be rescued with loads of tax-payers money, but that seemed to be everything, initially.

As the Dutch finance ministers all gloatingly told to the public, since 2009: "the Dutch state earned a massive profit on the loans and guarantees to the banks and insurance companies, which we rescued. It all have been very profitable investments".

It seemed that the North-European fire extinguishers had put the forest fire out in time, before it could cause real damage. And the South-Europeans?  They became the victims of the German / Dutch directives, rants and ‘Schadenfreude’: “Do as you are told, or else… you won’t receive a penny anymore!”.

The European Commission and the European Council, all extremely influenced by the Germans, who (of course) held all the money, put the South-Europeans on a disastrous road towards austerity without salvation. These countries (and especially the Greeks) were squeezed like lemons, due to the ruthless austerity measures that were put upon them. Their economies collapsed and their unemployment soared far within the double digits. 

Also the fact that financial aid for the peripheral countries came in very small tranches and under extremely strict conditions, led the countries further on the path of doom and gloom, instead that it offered them a solution.

[Ernst Labruyère: With the aforementioned statement, I don’t want to turn the peripheral countries into innocent victims. They made terrible mistakes during the last 10-15 years and they are mainly responsible themselves for the crisis in which they reside, currently. 

However, the solutions that the Euro-group and the troika chose, during the last 5 years, for especially Greece, Ireland and Spain deteriorated the situation in these countries distinctively, instead of improving it. For me, that is an undeniable fact].

In 2011, it seemed initially that the crisis was over in The Netherlands and Germany. Especially for The Netherlands this had been nothing less than a miracle: the country survived the worst crisis since the 1930’s with an unemployment increase of only 1.5%, where earlier crises with less economic impact showed unemployment increases of more than 4%. The housing prices had fallen only moderately and most parts of the economy (except for building and construction) did remarkably well. Germany performed even better.

It sounded almost too good to be true… And it was, in my humble opinion. In 2011, there was still something smelly in the Dutch economy… and it finally came out.

In one or two days, you can read the second part of this article…

1 comment:

  1. Thanks, looking forward for the second part...