Global Bubbles Trigger Global Crash
PIM of SPAIN | July 25, 2009 at 05:40 amby
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That is exactly the difference between a recession and a depression. In a recession people get laid off, and later called back to work when business turns normal. But in a depression, they are dismissed permanently. They deplete their unemployment benefits and become desperate. They must find new employment in new industries that don’t yet exist. Business cannot go back to normal, because normal is gone.
"In the period, 2001-2007, the Fed managed to do something that had never before been done, creating a worldwide bubble in just about everything. Stocks, bonds, art, oil, housing, you name it; everything went up. The only thing that didn't go up was the dollar."
How did the Fed pull off such a remarkable achievement? For the reason that they put up financial stimulus for everything!
After a half a century of stimulus with credit, inflation in which the money supply grew faster and faster, the Fed pulled the brakes during the mini-recession of 2001. Thereafter it dropped interest rates to just 1% well below the rate of consumer price inflation, and kept the rate far too long too low even after expansion had been going on for three years and economic activity returned to normality.
Stimulus stimulates. By 2007, the world economy had an expansion curve far too steep. Creating a situation in which even the stimulus didn't stimulate nearly as well as the feds hoped. Instead of increasing real production output in the US, it lured people to spend and speculate, which motivated Chinese entrepreneurs to put up new factories in order to give people something to buy. In America, debt grew 5 times faster than GDP; for each dollar of extra income, Americans added $5.50 to their debt. Meanwhile in China, manufacturing capacity grew faster than ever.
Whole industrial cities, the size of New York, were added to the map, in a matter of very little time.
But now the world has too many factories with too many people no longer spending, because they don’t have the money to consume.
Unfortunately, the whole economy became depended on consumers as the main driver, but now these consumers aren't consuming anymore, so there is nothing left to push the economy forward.
The jobs that disappear do have a "multiplier effect" that means people without a job don’t buying cars, houses or anything else above basic necessities, blowing the dream of a consumer-led recovery.
Again it is repeated, this is a depression, which require major structural changes. Recessions go on for a relative short period time only numbered in months, max. 18 month or so are needed to work down inventories. But a depression takes much more time, to restructure industries and rebuild balance sheets. All the debt needs to be paid down, or inflated away. And businesses need to change their business models into more profitable pursuits.
"Bubbles had been localized in the past. A bubble in one area drew investment from another area. In one market, prices soared. In another they slumped. Overall, things didn't change much."
But a worldwide bubble in everything is something totally new. And that bubble now is causing something else that also is new, a global crash!
Karl Gotthardt - albertacowpokeThese members have powered this story: