20-Year long Economic Slump
PIM of SPAIN | June 30, 2009 at 10:19 amby
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Today’s economy is in serious trouble, despite rigorous efforts by the US government and its many friends in the large banking institutions. The housing market battered by tsunami-like waves of defaults, foreclosures, overvaluations, historic levels of personal debt, and tight credit that has left the U.S. government as the sole lender in the market.
Bernanke and his kin may see green shoots, but what they're really are seeing is the deep, green sea rising up once again to bury the economy. That's the bad news.
The potentially good news, learned from Howe's research*, is that the “Crisis we're now entering will change pretty much everything. While this change will entail a great deal of pain and a reduced standard of living for a large number of people, by the time the Crisis subsides, society will have pretty much remade itself in ways that no one can predict at this point.”
In other words today's intractable problems will be solved, one way or another.
On a scale from 1 to 10 - with 10 representing as bad as the crisis will get – Howe says, “the crisis is between 2 and 3.” In other words, the worst is very much yet to come. While, he expects this period of turmoil to take 20 years to play out. Consequently economy and finance are in the doldrums for most of this period.
Millions of jobs are gone for good, and how millions more could disappear before we're through, while a long-term collapse for the dollar looks inevitable.
And yet, unlike other recent minor busts and even major corrections, the lesson hundreds of millions of strapped people are learning all over again is that same lesson our ancestors learned after 1929 during last century’s depression, that lasted from well after WWII till into the 1940s.
The law of personal and financial responsibility is as irreversible as the law of gravity. And no bureaucrat no matter how popular even with the help of multi-billion dollar bailouts can change that.
More explicit: the hearts and minds of consumers have been thrown into reverse. And it's this total psychological "impulse" that will make a back-to-baseline conventional recovery impossible any time soon.
Consider: total private consumer debt is nearly $2.5 trillion. How serious is that? Well, with the way "trillion" gets tossed around these days, it's hard to imagine. But trust me it is a hell of a lot of money.
People from Wall Street to Washington have a great deal invested in the belief that they can reverse this trend. Simply it is nonsense!
Capitalism operates by a process that the great economist Joseph Schumpeter called "creative destruction." It destroys mistakes to make room for new innovations and new businesses. Unfortunately, this puts it at odds with today’s government policy manipulating events to achieving what people want. When people make mistakes, politicians maintain that they are blameless: "who could have seen this crisis coming?" insinuating that someone else should pay for the loss.
So today, the feds, who mismanaged their regulatory responsibilities during the Bubble Era, are bailing out mismanaged corporations in order to protect banks that mismanaged their money. They are determined to prevent capitalism from making major changes in the worst possible way. Simple: They leave the mismanaging executives in place. Keeping brain-dead companies alive along with the zombie banks. Let the government take ownership of major sectors of the economy.
And charge a debt-ridden society with even more debt! The feds are expected to borrow $2 trillion this year alone, from whom? And who will repay it?
If America really wanted to protect its wealth, its power, and its position in the world, it should fight the depression in an entirely different way. Instead of bailing out failed businesses it should let them go bust. Instead of coddling the executives who mismanaged their companies, it should turn them loose. Instead of shoring up reckless banks, it should help knock them down.
As a replacement for spending money on stimulus programs, it should give money back to the taxpayers so they can stimulate the economy, or not, as they choose. Taxes should be cut in line with government spending. This would boost savings, reduce debt, and gradually increase investment and consumer spending too.
But that is not the road, which government has chosen. People have elected a president willing to go along with history. Instead of scaling down, he is scaling up. Instead of reducing America's indebtedness, he is increasing it. Instead of going for safety, he's going for broke.
There's no way of telling where the Crisis will lead, or how it will end. That's going to depend not only on the one who is in control, but what they do, who they're up against, and a hundred other variables that can't even be anticipated.
One thing that seems certain is that this crisis will bring out strong leadership.
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