It is possible that some event, such as the bankruptcy of General Motors may still precipitate a further decline. It would, indeed, be unusual for there to be no significant aftershocks following what may now be called the 2008 recession. Yet the rise in the global stock markets in the first half of 2009 has been substantial and reassuring. Investors will need to be careful, but are likely to feel that the greatest danger has probably passed. If so, they will want to invest in the opportunities that have been created by the recession itself.

Oil and gold prices have been linked for most of the period of the recession. In recent weeks, both have been in a stage of recovery. The gold price has reached $982 an ounce, close to its peak when it touched $1,000 an ounce. Oil prices fell in the recession by about 70 per cent, and have now received about 50 per cent.

The recovery in the gold price reflects a number of factors. The Asian economies have accumulated excessive quantities of dollar securities, and the Asian central banks are reluctant to continue accumulating dollars, except on a purely speculative basis. The weakening of the dollar has had a reciprocal effect in the strengthening of the gold price. There is also a fear that the Keynesian policies which have helped to create the appearance of a global recovery will, at some point, lead to a revival of inflation.

Angela Merkel has criticised the world's central bankers; she is afraid that their expansionist monetary policies could make the crisis worse. That lady is no Keynesian, but she is the Chancellor of Germany, which is Europe's leading economy. The European Union is the world's largest trading bloc. She has said that what these central banks have been doing "needs to be reversed. I am very sceptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe." One does not have to agree with Chancellor Merkel to take notice of what she says. She is one of the world's most powerful politicians.

Underlying the rise in the oil price has been the basic strength of oil as a commodity. The world has probably reached the point at which oil supply has peaked - if not, we are close to that point. The growth of the huge economies of China and India is limited by the long term constraints of the oil supply, more than by any other factor.

If the recovery does continue, the oil price will regain the level of $100 a barrel, and the gold price will rise well above $1,000 an ounce. My own expectation is that these figures will be exceeded substantially, perhaps to $150 or $200 a barrel and $1,500 or $2,000 an ounce. But that will limit the possible global recovery. The world has, indeed, been living beyond its means, in terms of the oil supply. Everything else depends on that, and will have to adjust to a higher oil price.

William Rees-Mogg
for The Daily Reckoning Australia

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Yet one still has to worry about the United States itself, despite the optimism being expressed by the Federal Reserve Board. The two obvious weaknesses of the U.S. economy are housing and unemployment. In April, new residential building in the U.S. fell to its lowest level in fifty years, dropping to an adjusted annual rate of construction of 455,000 units. Housing starts dropped by 12.8 per cent, bringing their fall for the year to 54 per cent. At the peak of the housing boom, in January 2008, housing starts reached 2.27 million; the fall from the peak is now 80 per cent, and there is no immediate sign of a recovery.

Lex, in The Financial Times, makes the rather pessimistic comment that “the U.S. housing market is still there, stubbornly refusing to improve… The trend has defeated every effort to call a bottom in the market”.

There is still a large inventory of houses available for sale, overhanging the U.S. housing market. According to the National Association of Realtors, this inventory stands at 3.7 million, equivalent to 10 months supply. On top of that there is a shadow inventory of homes which have been foreclosed by banks, but not yet put up for sale. Foreclosures themselves are still rising, by about a third, year on year. That rise is expected to continue, if only because of the rise in unemployment.

Of course, the unemployment figures themselves are lagging indicators. They will continue to rise when the worst of the financial recession is over. In the last eighteen months, U.S. unemployment has virtually doubled; it seems certain that U.S. unemployment will reach 10 per cent in the second half of 2009, and probable that the increase will continue in 2010.

These two indicators are worrying, because they interact. If unemployment continues to rise, still more houses will be repossessed, and will eventually come onto the market. House prices will continue to be weak, as banks seek to recover their loans, whether directly owned or expressed through derivatives. The banking industry will continue to depend heavily on Government injections into the money market. The sickness of the money market caused by toxic debt will remain a problem. It was the impact of the housing collapse on the banking market that created the 2009 recession, the worst recession in 50 years. Until the housing market stabilises, the money market cannot be better than convalescent; until the money market recovers, unemployment in the U.S. is likely to go on rising.

In the history of recessions, their depth and duration has been broadly proportionate to the initial impact of the shock. In the United States, the aftershocks of the Great Depression continued until 1938. The economy was finally lifted out of depression by British orders for armaments. We may well have reached the point at which the decline is decelerating, but the trends in U.S. housing and unemployment are still unfavourable. It is likely that there will be further periods of bad news, as well as rallies. We should not exaggerate the scale of recovery.

William Rees-Mogg
for The Daily Reckoning Australia

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Of the contemporaries we have Irving Fisher, Maynard Keynes, Friedrich von Hayek, Joseph Schumpeter and a group of less well known figures, including the disciples of Keynes, such as Roy Harrod, who became his first biographer. The post war writers include J.K. Galbraith and Milton Friedman. These are among the distinguished economic theorists of the twentieth century. The explanations and policy proposals include Fisher’s Debt Deflation theory, Schumpeter’s theory of “creative destruction”, Hayek’s theory of the cycle of expansion and decline – written in 1927, Keynes’s General Theory, published in 1936, monetarist and psychological explanations, pro-gold and anti-gold, pro- and anti- inflation and deflation. The statesmen who took the decisions at the time include Herbert Hoover, who did better than the myth of his inadequacy, Roosevelt, who was an inflationist, but probably at the right moment, Neville Chamberlain in the U.K., and the combination of Hjalmar Schacht and Adolf Hitler in Germany. Roosevelt believed in large scale Government intervention for infrastructure projects, Chamberlain believed in low interest rates and Government economy, Hitler believed in trade autarky and massive rearmament; there was even Pierre Laval in France and Benito Mussolini in Italy, both of whom could politely be described as pragmatists. If one had to award prizes for success in restoring growth to national g.d.p. one would have to award the top prizes to Schacht, for successful manipulation of the Central Bank role, and, however distasteful if may be, to Hitler for reflating the Germany economy through rearmament.

I have been more and more struck by the lack of progress, not only in the period since 1929, but in the period since the Panic of 1907. In 1907, there was no Federal Reserve Board, and the resources of the Federal Government itself were limited by the small size of the tax base – the Supreme Court had previously declared that a Federal Income Tax would be unconstitutional, and the constitutional amendment which made income tax possible only came after 1907. In the absence of a Central Bank and of taxing power, the U.S. Government in 1907 could not use either of the two modern weapons of control, interest rates or Government spending. In fact, the panic was stabilised by the action of a small consortium of New York banks, led by the great banker, J.P. Morgan himself. He divided the sheep from the goats. The Knickerbocker Trust went down as too insolvent to be saved. Other houses were declared sound, and J.P. Morgan made good his word. In 1907, the panic was halted and the subsequent recession was comparatively mild. The management of the 1907 panic was firmer and better defined than that of 1929 or 2009.

We still do not know what causes a depression, how to prevent it or – short of a rearmament programme – how to reverse the momentum of the contraction. We do not even know whether to inflate or deflate, or when to do so. These will be the questions for debate after 2009, just as much as they were after 1933, or indeed after 1907.

William Rees-Mogg
for The Daily Reckoning Australia

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It is worth studying the 1907 panic. It was a global panic, though not the first panic to have a global character. The French Mississippi Bubble and the English South Sea Bubble both burst in 1720, and that was nearly two centuries before the panic of 1907. It was the last important financial crash to be stabilised by the actions of private bankers, in this case by J.P. Morgan himself. It led to the ratification in 1929 of the sixteenth amendment of the U.S. Constitution, which made a federal income tax constitutional. It also led to the creation of the Federal Reserve Board, therefore transferring the ultimate management of finance to the U.S. Government and to the Fed itself.

Mr. Vanderlip attributed the crash to the costs of wars and to the political vilification of the financial world by politicians and journalists. "We must run back to some of the roots to the terrific losses which the world's capital experienced as a result of the Boer War costing as it did one billion of dollars, the Japanese-Russian, which cost one and a quarter billions, and the losses of the San Francisco disaster (the earthquake) which footed another half billion. Here we have figures of nearly three billions of dollars directly lost to the world's capital."

Mr. Vanderlip also blamed the demand for capital which had resulted from the boom in American industry. "We have seen railroads and other corporations inexorably pushed to build new lines, to add to their equipment and to extend plant. But although the corporations were forced to make these expenditures by the demands which broadening industry and growing commerce made imperative, they became at last, owing to the exhaustion of the world's investment fund, unable to sell securities to provide money for their forced expenditures. They were unable to sell bonds, even though the security that was offered was wholly above criticism. The investment capital of the world became well nigh exhausted. That phase of the situation was by no means confined to America. It was international in its origin and world-wide in its effect."

Some of this we can easily recognise. Essentially it is a monetarist explanation, but seen from the point of view of the Gold Standard. There is a certain stock of money in the world, ultimately represented by gold coin or bullion, most of which is held in the banking system. The costs of war and earthquake have led to that stock being drawn down. Industrial demand has increased to the point at which there is a shortage of money relative to the demand for capital. This is not all that far from being an alternative way of describing what Irving Fisher called a process of "debt and deflation", or Joseph Schumpeter called "creative destruction". In both cases, money is seen as a real object. The world's limited monetary capital, seen as so many owners of gold, cannot simultaneously be spent on fighting the Russo-Japanese War and building an extension to an American railroad. Because money is limited by the quantity of gold, it imposes choices on Governments and on businessmen.

If one takes Irving Fisher's equation of exchange, in which mv = pt, one can see the choices that are actually available. m stands for money, and in a gold system it can only be increased by new mining or by melting down scrap. In practice gold convertibility makes the money supply a fixed factor.

v stands for velocity. This is the key variable now, and it was in 1907. The velocity of money depends on the level of confidence. When bankers believe that there are surplus available funds, the money markets run freely, and those businessmen who need funds can usually raise them without difficulty. When confidence is weak, velocity will be slow and funds will be scarce.

The other side of the equation is pt - prices and transactions. When money is in short supply, or velocity is slow, prices will be weak and transactions will be reduced in number.

We do not know how far practical bankers, like Mr. Vanderlip, thought in these monetarist terms, but clearly they had to assess the demand and supply of money. In seeking an explanation for 1907, Vanderlip recognises the psychological factor: "The financial crisis," he writes," has by no means been altogether a matter of money. It has, in large measure, been a matter of what was in men's minds."

In 2009, we have had similar experiences, in which real economic events interacted with human anxieties and expectations. All banking depends on confidence. So long as the expectation holds up, credit will be firm. Once expectation turns negative, then everyone becomes nervous of lending. In 1907, gold was the measure of confidence. I do not see what measure of confidence we can now rely on.

William Rees-Mogg
for The Daily Reckoning Austalia

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"If, on the breaking out of any future war, we shall not have very considerably reduced our debt, one of two things must happen, either the whole expense of that war must be defrayed by taxes raised from year to year, or we must, at the end of that war, if not before, submit to a national bankruptcy; not that we shall be unable to bear any large additions to the debt; it would be difficult to set limits to the powers of a great nation; but assuredly there are limits to the price, which in the form of perpetual taxation, individuals will submit to pay for the privilege merely of living in their nation country." (Ricardo, Principles, Ed. Straffa, p.249).

Gordon Brown has no intention of embarking on a new war, though he has defence commitments in Afghanistan, but he has failed to foresee that a large deficit makes it more difficult to support future deficits. They will be harder to meet by borrowing and they will result in levels of taxation which will discourage enterprise and possibly lead to migration.

On page 356 there is the statement on which the nineteenth century gold standard was based:
"Experience, however, shows that neither a State nor a Bank ever have had the unrestricted power of issuing paper money, without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issues of paper money to the obligation of paying their notes, either in gold or bullion."

Under the gold standard, national governments had to regulate the issue of money by the discipline of convertibility into gold. William Stanley Jevons published his book on Money in 1873 - 58 years after Ricardo. He quotes Daniel Webster's observation about the U.S.: "We have suffered more from paper money than from every other cause or calamity. It has killed and caused more injustice than even the arms and artifices of our enemy." Jevons also observes, in his own right: The principle objections to "inconvertible paper currency are two in number,. 1. The great temptations which it offers to over issue and consequent depreciation. 2. The impossibility of varying its importance in accordance with the requirements of trade."

The essential qualification of an exchange system in classical Ricardian economic theory is therefore one of convertibility. The value of a currency is determined by its relative scarcity, and its relative scarcity is determined by its convertibility at a fixed rate into a fixed commodity; the Victorian economists regarded gold as the most convenient commodity, and the one which had the nearest to a stable rate of production.

There is a growing feeling that the present economic crisis requires a stabilisation of national currencies against some sort of world currency. The Chinese Government is interested in a world currency system such as Maynard Keynes advocated at Bretton Woods in 1944. The Russians have called for a partial restoration of a gold based system. In The Daily Telegraph of March 30th, Ambrose Evans-Pritchard reports that Arkady Dvorkevich, the Kremlin's Chief Economic Adviser, has stated that Russia "favours the inclusion of gold bullion in the basket-weighting of a new gold currency based on 'Special Drawing Rights' issued by the International Monetary Fund."

Historically, the world has moved in the course of a century from the pre-1914 gold standard, which was a system of classical discipline based on convertibility into gold, through a succession of floating rates, with the ultimate American convertibility into gold broken in 1971. As Jevons observed, an inconvertible floating paper money is in practice extremely liable to over-issue, leading to inflation. In the absence of convertibility at a fixed rate, a currency degenerates into mere paper. The Russians are the second largest gold producer, and are also major oil and gas producers. Naturally, they would like gold to play a part in any bundle of assets on which a new world currency might be based. We are in an early stage of a new exchange debate. What is interesting is that the debate has started with big power participation from China and Russia.

William Rees-Mogg
for The Daily Reckoning Australia

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However, the question I find most interesting is whether gold is a real asset. One of the problems of investment is that there are two variables, reality and liquidity. Land or property are relatively illiquid, but are also real, in that they have a use which does not depend on their value in exchange. Gold is highly liquid, indeed it is more liquid than paper money. In extreme circumstances, paper money can lose all its value, when gold is still acceptable as payment. In 1940, when the French Army was defeated, many French people took to their automobiles to escape the advancing Germans. They found that petrol stations would not accept paper francs, but would sell their petrol in exchange for gold coins.

Gold also remains an acceptable currency in periods of high inflation, when paper money can lose all its value.

What does “reality” mean, when applied to an investment? Obviously we talk about “real estate” to describe the legal possession of property. I think that means property with a permanent character and at least a potential use. In the same way, the traditional theorists of the gold standard would say that gold was a real currency, because it has permanence and a potential non-monetary use.

I accept that reality in an asset is a relative factor. In an ideal world, we would all like to hold our financial needs in a currency with a high degree of permanence, strong alternative uses and high liquidity. We have to make do with currencies which fall short of perfect “reality”, and fall short of perfect liquidity as well. We make do with imperfect currencies because we have no choice.

Gold makes one think about these issues, but it makes one even more uneasy about electronic money. In book publishing, I am well aware of the library demand for archival books which can reasonably be expected to last for centuries, like the printed works of earlier centuries. We need also to have permanent money, which can be relied upon to survive, even it its value may decline over time. The historic value of gold has been astonishingly stable over centuries.

In an extreme example, one could be worried about the issue of money and about its preservation. Mr. Madoff has shown that fraud can reach the unbelievable level of $50 billion. Might there not be still larger frauds, so large as to achieve what the wartime German operation attempted, a complete take over of a targeted currency?

Cybercrime is already operating on a huge scale. Suppose that Al Qaeda, instead of attacking the twin towers, had attacked the electronic systems which record all the monetary holdings of New York. No lives might have been lost, but an electronic pulse might have erased one of the central counting houses of world finance. The world might have been ruined.

Is there not some element of this cybercatastrophe in the present world crisis. Reality may be a variable concept, with nothing 100 per cent real and hardly anything zero per cent. When I was born, in 1928, gold was money, and gold was over 90 per cent real. In 1970, when I was in my forties, money was paper, and even the convertibility into gold of the Bretton Woods Agreement was breaking up. Now money is a largely unidentifiable electronic pulse, itself vulnerable to attack by electronic means. Virtual money has very low reality, much lower than paper.

Surely this is a system which could be blown away because there is nothing in it to gain confidence. Even a return to paper money would raise the level of reality attached to world currencies. There is a problem of raising the reality level of all currencies – a problem which nineteenth century economists solved by convertibility to gold.

William Rees-Mogg
for The Daily Reckoning Australia

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It is now thirty two years since we made that visit. The change in China has been beyond belief. In 1977, China was still a land of bicycles and physical labour. It was also a land of absolute authoritarian orthodoxy. One would get on an aircraft, leaving behind an obsequious official, spouting the party line. One would disembark a thousand miles away, and be greeted by another official minder, repeating the same party line, almost without a pause.

People still criticise the monolithic power of the Chinese Communist Party, but the relative change is what strikes anyone who knew the old China. China may not respect civil rights or allow certain kinds of free political discussion, but the new China is inexorably much more open and free than the old China.

That is just as well, as it is becoming apparent that the resilience of the Chinese economy is the world's best hope in the present depression. If one looks at the reaction to recession of the United States, Germany and China, one is impressed by the strength and confidence of the Chinese response. I would list the three powers in the order of China, the United States and Germany, for their contribution to the process of world recovery.

Joseph Schumpeter analysed the Great Depression in terms of "creative destruction". He thought that cyclical recessions and depressions wiped away obsolete economic systems and allowed them to be replaced by fresh structures. Recessions are necessary to speed up the capitalist forces of change.

For the last 33 years, the Chinese economy has been growing two to three times as fast as the United States, and that has continued even in a year of recession. The Asian economy has been taking over the lead from the Western economy, though the performance of the Japanese economy has been disappointing.

I expect that this Chinese outperformance will continue as the world moves into recovery. We can now see the pattern of the three centuries: 1815-1914 the British Empire; 1945-2008, the American era; about 2030 -2100 or beyond, the new Chinese era. China is overtaking the West and the process has been accelerated by the recession.

William Rees-Mogg
for The Daily Reckoning Australia

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At the same time, the euro has become more attractive to the weaker European currencies which are outside the Eurozone. The Polish Government has reasserted its intention to joining in 2010. Small countries which already belong to the Eurozone, such as Ireland, feel that it helps them to survive the recession, and that it would be very dangerous if they still depended on the Irish Punt; it would not be safe to depend on a small currency for a small country in such a big crisis.

Superficially, these contradictory attitudes have taken all the heat out of the debate on euro membership, but it has left open the problems which arise out of euro borrowing. Increasingly, the widening spread on the yield of eurobonds, with Greek eurobonds yielding almost double German, has led to discussion of common European borrowing, which is one way in which Germany could raise the solvency of the weaker European nations. In theory, this could become a virtually cost free way in which the strong could help the weak. If, for instance, Germany were to sell eurobonds and pass them on to Greece, then so long as Greece remained in the Eurozone, Germany would receive the appropriate income in euros and would suffer no loss. In effect Germany would offer a free guarantee that Greece would not actually leave the euro. As this would reduce the pressure on the euro system, it would actually be in Germany's interest, unless or until the guarantee came to be called. It would strengthen the euro system by removing the weak link of the eurobond spread. Of course, there would have to be negotiated terms to protect the strong countries from potential fiscal extravagances of the weak.

On the other hand, the challenge to the Lisbon Treaty in the German Constitutional Court has been more successful than was expected. As reported in Open Europe:
"On 10 and 11 February, the German Constitutional Court in Karlsruhe held hearings on whether the Lisbon Treaty breaches the German Constitution. That two full days were taken to stage the hearings shows that the Court has some major concerns about the Treaty.

The 'reporting judge', Udo di Fabio, pointed out that the Treaty involved a clear extension of the EU's competencies. He said, "One has to ask soberly: What competences are left with the Bundestag (the German parliament) in the end?" He also bluntly asked "whether it would not be more honest to just proclaim a European federal state".

Furthermore, he questioned whether the transfer of powers to the EU really means more freedom for EU citizens, asking "Is the idea of going ever more in this direction not a threat to freedom?" (FAZ, 11 February; Euractiv, 12 February).

Five of the eight judges must approve the ratification bill for Lisbon in order for it to come into force. Incidentally, five of the judges pursued a line of critical questioning, suggesting that they are not convinced by the German government's assurances that the Treaty does not impact on the German Constitution (BBC, 10 February).

The Court may ask for a referendum if it finds that the Treaty detrimentally affects the country's Constitution. Article 146 of Germany's Constitution provides that a referendum may be called if the German constitutional order is changed and Gesine Schwan, who was the Social Democrats' nomination for the German Presidency, said she would support a referendum on the Lisbon Treaty. (Sueddeutsche Zeitung, 11 February; Wienerzeitung, 12 February)

The Court's decision is expected in May or June but the judges' comments should be treated with caution. Although not impossible, it would be sensational if the Court ruled in favour of a referendum. Either way, the judges' comments highlight the serious reservations existing within Germany about the Lisbon Treaty."

No doubt in the end Germany will find a way to ratify the Lisbon Treaty, whatever the German Constitutional Court may decide. There is a strong tendency for apparent setbacks - such as the "No" vote in the Irish referendum - to lead to ever closer integration in Europe. But that will take time. The Eurocrats want Lisbon safely ratified by all countries before May of 2010, when there will be a British General Election. If the Conservatives win that election, they will withdraw the British ratification when Labour forced through Parliament without the promised referendum.

William Rees-Mogg
for The Daily Reckoning Australia

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It had been hoped that the Geitner plan would support a further rally in the stock market. In fact, he only spoke for half an hour. During that period the S & P 500 fell by 3.4 per cent. The market – and particularly the traders – was disappointed by his lack of detail. Some people expressed disappointment that he did not commit the new administration to drawing a line under the crisis. The new administration had allowed expectation of a New Deal to grow, and this was not a new deal.

On Wednesday, the Bank of England published their inflation report, which was preceded by a briefing by the Governor of the Bank, Mervyn King. Mervyn King had a better response than Tim Geitner, though he would be embarrassed for anyone to say so. The Bank of England did not draw a line under the recession, but it did reveal a new forecast. It expects the trough of the recession to come in the middle of 2009, to be followed by a recovery which would take the British economy back into growth by the Spring of 2010. This is the V shaped recovery which everyone, not only in London, is hoping to see. As it is unlikely that the British economy will have so strong a recovery in the year from mid-2009 to mid-2010 unless there is a strong global recovery, we can take the V shaped recovery as the Bank’s forecast of the major world trend.

The Governor qualified this relatively optimistic forecast by discussing the “paradox of thrift”. “In the longer term,” he said, “the national savings rate will have to go up. In the short term, if it were to rise now, we’d be in an even deeper recession.” The recession happened because of the mishandling of debt, both in Britain and in the United States. Yet, on this argument it is necessary to create an environment of higher spending, lower saving and rising debt, if the world is not to be sucked downwards in a deflationary spiral. We have to do all the wrong things in order to achieve short term recovery. This is against a Central Banker’s instinct. Indeed it puts the short term ahead of sound longer term finance.

The Bank of England is preparing to embark on “quantitative easing”, in order to turn round the recession in the period 2009-2010. This scares everyone. Neither the United States nor the Eurozone has embarked on quantitative easing – nor indeed has Britain, as yet. The Governor’s actual words were: “When it comes to being able to do a wider set of operations involving the Monetary Policy Committee, I’d like to think that when the M.P.C. meets, it will be in a position do to that.” The Monetary Policy Committee will next meet on March 5th, so Britain may be only three weeks away from an experiment of a computer generated money supply increase. The money will not need to have been printed, but there will be an addition to the U.K. money supply. Flat money will have become virtual money, or perhaps one should say that virtual money will have become flat money. This scares me, and I think it scares most people.

The best hope is that the recovery in the 2009-2010 period will actually occur. The model for the Recession of 2008-2009 has so far been the Great Depression. The Great Depression started with the Wall Street panic of October 1929. The low point came in the middle of 1933 if one measures in terms of growth of G.D.P. The present Recession started in August 2007, with the first freeze of interbank lending. From start to trough in the Great Depression was about eleven quarters. If the present Recession lasts for eleven quarters from the beginning to the trough, then the trough will come in the first half of 2010.

That would be nine months later than the Bank of England forecast, and it would suggest that a return to growth would come in 2010-2011 rather than 2009-2010. But perhaps many of us would now settle for that.

William Rees-Mogg
for The Daily Reckoning Australia

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The President-Elect, Barack Obama, seems to become more Rooseveltian day by day. He has established a close personal relationship with the American public. Roosevelt used the “fireside chat” on radio to create a very similar personal following. It seems quite possible that, at some stage, President Obama will have to face the same denigration which Roosevelt suffered. Obama, like Roosevelt and Kennedy, has surrounded himself with a group of able public servants, a “brains trust” in Roosevelt’s terms, or the “brightest and best” in terms of President Kennedy. Some of them are Republicans. That will not protect them from suspicion and animosity.

There is, as yet, no answer to the one question which really matters: “Will the new economic policy be successful in turning around the U.S. economy?” We shall not even begin to get the answer to that question until after the Inauguration, but we should get the outline of President Obama’s New Deal inside the first hundred days – as the world did with F.D.R. Like Roosevelt, Obama has been extremely reluctant to be associated with the economic policies of the incumbent President. The Democrats campaigned against Herbert Hoover in 1932, and found the experience so agreeable that they campaigned against him again in 1936, 1940, and to some degree were still using him as a campaign bogey down to 1960 – the Kennedy election. I think that George W. Bush will suffer the same fate. He will be an asset of the Democratic campaign machine for the next twenty years or more.

Unfortunately the New Deal was not really a success as a response to the Great Depression. Public works may become necessary for public reasons. That was true of the development of the U.S. highways in the 1950s, and of the electronic communications infrastructure in the 21st Century. But where the work appears to be necessary, that generates its own support for public programmes. At present, the U.S. communications infrastructure is looking obsolescent, with rusting bridges and tired concrete structures. But works cannot be planned or authorised overnight. There will be years before they provide substantial employment, and it is rising unemployment which is the immediate concern. In Roosevelt’s case, the public works of the New Deal failed to restore a full employment level until the rearmament orders – mainly from Britain – came in 1938.

The present situation is not easy to predict. Some analysts believe that there will be a recovery in the second half of 2009. That is possible, as the stock market is becoming very oversold, but it is far from certain. The credit crunch of 2007-08 is the most serious recession in the post-War period. It will not vanish when the immediate crisis is over. There will be a longer period of recovery, and more major casualties to come. I wish everyone a Happy Christmas in which to prepare for a difficult New Year. Let us hope that happy days will be here again with President Obama.

William Rees-Mogg
for The Daily Reckoning Australia

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