Economic depression’s consequences:
The sunny years have passed. Now there are storm clouds on all horizons, consumer confidence has evidently disappeared.
In my first two issues is explained why we are heading into a depression and what the situation is all about. In this issue a more in depth analysis is made to better understand its influencing consequences. See also:
When all went well, people thought things weren't true. Now, they don’t believe things are true. It is the other way round. Once was believed people forever could get richer by wasteful spending of money that wasn’t theirs, who now are looking to their respective Governments for financial support.
Depressions are quite exceptional so no statistically reliable evidence and information is available. No general parameters do exist because this phenomenon is just too extraordinary. Hardly anyone still alive does remember the depression of the '30s and are able to recall the circumstances that then took place. As explained before: a depression is not a pause but the end of the economic road. It is a situation in which debt is squeezed out of the overheated economy. In these circumstances bailouts, financial aid, and government stimuli packages are inadequate, in fact these hold back the process for recovery. Reading present days’ press, this examination unfortunately represents a minority view.
During the bubble era people spent too much money they had not earned on things they didn’t really need. Once the credit crunch became fact, Policymakers do think money has to be spent on investments no one really needs, like the bridges in Japan in the 90s that were built leading to nowhere, just because of creating jobs, growth and inflation. Even respected economists are of the opinion that during a depression, resources that have been made "idle" just have to be put to work again, while in fact there is too much of everything like houses, cars, TV-screens, etc. Before the crisis is over and a new economic era takes shape such investments to augment labour or resources are likely to be another mistake. Better to be innovative and spent money on part-time dismissals that the Harbour of Rotterdam has implemented.
Instead of allowing nature to correct the excesses that were caused by the '90s bubble in dotcoms, which then applied lose money approach, initiated the biggest speculative rush in history. For about four years, the lending rate was kept below the level of consumer price inflation. In other words, money in fact was given away. No wonder people borrowed too much! This created a new bubble that not took place in the stock market, but in the housing-market. And since housing is the core asset of most families, when this bubble popped, it caused far more damage than the implosion of the stock market in 2000. In the last two years, homeowners have lost about 20%-30% of their houses' value. Stock-market investors are down about 35% and more. The world now is entering the worst recession since the '30s that will turn into a depression from which we yet have not seen its full extend. Its turnaround point has not yet been reached worst may be expected to come.
People thought that property always went up no matter where it was bought. It was madness when it went up, and now it is becoming another madness on its way down. Houses are put on the market or auctioned off without obtaining even a bid, whatever the price nobody is interested to buy it. Even new cars do crowd showrooms and meadows those frequently are offered with discounts of over 30% without finding a buyer.
The subprime lending was the start of the credit crunch in the US. Japan still is in dire state for twenty years in a row and Europe may be the battleground for the next wave of loans that go sour, however from a different angle. European banks are at a significant risk. Eastern European nations have borrowed an estimated $1.7 trillion, primarily from West European banks. Eastern Europe already is in such a deep recession that it equals a depression. A major part of that $1.7 trillion is at risk, especially the loans that are nominated in Swiss francs and Euros. It is of an order that easily could be as big as the US subprime credit-crunch.
Moreover severe riots are in the making and in some countries already taking place to demonstrate against governments’ mismanagement.
To bring the enormous quantity of stimulus packages, running in the trillion that are implemented in better perspective, I refer to information obtained from the San Francisco Chronicle that recently was published.
According to this study conducted, about all the bailout and stimulus packages together, these add up to a total amount of $8.5 trillion, including the $700 billion Wall Street bailout, the $600 billion to Fannie and Freddie and the $168 billion in stimulus checks and so on.
To look at this from another viewpoint, that’s more than the US spent on the New Deal of $500 billion. The invasion of Iraq spent $597 billion. NASA’s entire lifetime-budget costing $851 billion.
Actually it is even more than all of these combined, included with the $256 billion that was spent on the S&L bailouts of the 1980s, the $217 billion spent on the Louisiana Purchase, and the $454 billion that was spent on the Korean War!
This unparalleled ocean of artificial liquidity will surely lessen the effects of the recession, however the unplanned consequences do cause INFLATION followed by STAGFLATION that could wipe out the savings of millions of people. It could become the “Bailout Bombshell” without solving the economic crisis that more and more is becoming a depression. Tackling a depression, as explained above, needs other measures, that yet are unknown and policymakers are unfamiliar with.