Economy’s turnaround (part 3)

In the two previous issues about this subject the economy is judged from the Macro and the Business viewpoint. Macro deals with the overall approach as bank institutions, while Business with the industrial side of the Economy. In this issue the Micro economic aspects for employees and workers will be examined. Particularly what should be done for workers who have lost or are losing their job.

Easy credit killed the consumer and can be seen as the main cause of today’s crisis. When banks started under command of Mr. Greenspan to flood the market with money to whoever wanted to have it, the global binge of mainly workers themselves started to consume beyond their means, by buying things they didn’t need with money that wasn’t theirs. The FED and associates wanted to flood the market with money to keep the economy growing and running whether then a recession could have been avoided! At the time Vice Chairman and now Chairman of the FED Mr. Bernanke, nick named the helicopter pilot, wanted to drop money from the air as much as possible to get more money in the hands of workers and employees. He was the initiator with Greenspan to put money in everyone’s pocket to have that spent on anything and so they did, to let economy grow to the detriment of consumers.

With the result that the global financial system became built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion became standard practice, and now this flood of money will not be coaxed into reduction by stimulus packages, thus adding (!) even more money to the ‘money flood’ even worse the economy cannot be repaired into health by government buyouts and bailouts. It is the wrong medicine, like; flooding the land with water to get the floods disappear everybody may understand that this is not the solution. However this approach is now applied, making a bad crisis even worse. In the end it is the job loser who pays the bill. Innovative thinking has to be applied to help them out.

To remind you: we are not in a recession this is a depression as explained before. In a depression more money won’t work to get people back on the spending track. They have become scarred to death and pay their debts down and thereafter start saving. The thrift from the eighties will return and become a common habit. Good for the consumer but bad as a stimulus for the economy. Now it will be clear that all these financial stimulus packages will not going to work and just is throwing good taxpayers’ money after bad. An innovative approach could be for example…

Forget Global, act Local: There are many towns becoming deserted because of the crisis. Specifically the towns that were driven by industries those now are defunct. All these empty buildings and houses make it a ghost town to the detriment of security. It is important to attract people that are willing to live in such deserted areas. Governments could undertake the following: For people that have the courage and drive to take their lives in their own hands there will be no welfare of all sorts, no unemployment insurance, no child tax credits, no other kind of welfare as food stamps, nothing, except the money donated by privately-sponsored charities. All public schools are closed. All bureaucrats and other state employees are thrown out. All rules and laws governing employment are abolished no minimum wages no overtime, in short forget all existing rules. All residents are required to say ‘please’ and ‘thank you’, let them dress properly, and scoff at people who don't seem to be productive, disciplined or are impolite. Declare this area a Free Trade Zone. In exchange for cutting all aid programs, by eliminating federal and state taxes for people living in this area. Allow unlimited immigration into the zone giving all immigrants a passport after 5 years of residency. Levy a flat 10% tax to pay for basic services. Eliminate elections but have the area controlled by a council composed of 10 citizens chosen at random. Within five years, the zone could be the most dynamic area in the nation.

Policymakers believe they can print up paper money that is as good as the real thing, in order to solve this depression that causes INFLATION, and thereafter STAGFLATION followed by HYPERINFLATION. Realize this is not a recession there is no buying opportunity. It’s a depression that could take a long, long time to recover.

The difference between a recession and a depression is explained before, but to not misunderstand the severity of the economic situation we are in. A recession is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned as stocks, bonds, houses, derivatives, and even debt are all called into question. No one knows what these are worth, now the economy that created those, no longer does exist. That’s now the big uncertainty. The majority of businesses that were set up to provide products and services to the consumer binge economy will not survive, all the debts and obligations that the consumer economy produced are no longer viable.

But eventually, unless the feds stop the process of money flooding, things will sort themselves out. Businesses go broke. Homeowners are distressed. Automobiles go back to the dealers’ lots or are reposed and auctioned off. Prices sink to a level where people are able to buy. And the whole process starts over again. This can take a long, long time, particularly when government is trying to stop it with injecting more money into the market.

The mortgage debt that houses carry, which was recycled into a leveraged debt instrument is bound to be worth a lot less than once thought. Now called toxic assets to be accumulated by the Government in a ‘bad’ bank.
For at least during the near future, people are afraid of making the wrong move, which markets do freeze up? No one wants to lend when it isn’t known if he gets his money back. That’s called ‘credit crunch.’ And no one wants to buy when he has no idea what things are worth. That’s when markets freeze.

Japan is still trying to adjust to the realities of its post-bubble world, after the initial crash of 1989 now almost 20 years ago. It propped up banks instead of fixing them. The banks were kept alive but not turned around to performing an better functioning, which resulted in two lost decades.

In the depression of the ’30s, zombie banks were allowed to die. Thousands of banks were buried. However the economy didn’t really recover until after WWII about two decades after the crash of ’29. Perhaps that isn’t enough, zombie companies must be allowed to fail too. And all the zombie investments made in the preceding bubble years as well. What is needed is a period of creative destruction. But in this period, we don’t know who’s a zombie and who’s not. Not yet. It will take time to find out. A new economic model must take shape. Then, the markets must tell us what are valuable assets and what those are worth.

An example: Shopping malls were designed for an economy in which consumption increased at a more-or-less predictable rate. As consumption increased, mall owners could project how much retail space they could let out, and what yield it would produce. Based on those figures, banks could lend against the value of the mall, and investors could put their money to work by building new malls. In today’s environment all has become uncertain.

There is still more to follow. Meanwhile the best you could do: spread this message and wisdom to your friends for a better understanding the state of affairs of today’s crisis where they are in. It certainly will help to speed up the recovery process!