Recovery Wishful Thinking
PIM of SPAIN | August 19, 2009 at 07:55 amby
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Cash for clunkers and any other stimulus plans are stealing future business. People that bought now under the program would have bought next year of thereafter.
Stimuli do not help the economy. It is like replacing broken windows, or clunker cars; it takes resources away from some other uses, consequently not an expanding business operation that should stimulate ongoing economy growth or at least economic stability.
This unseen effect is actually greater than the seen effect - the improved market for new cars. Lured by phony price structure, buyers send phony signals to the rest of the economy. The automakers produce more cars than they should do. Steel, which might have gone to refrigerators is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders.
Savings, which might have been invested in new industries, go to prop up old ones. Stupid when you read this, but the truth is that governments apply this policy to save their reelection, in what they think is saving lost jobs. The famous American spirit is gone these days!
Trying to 'recover' from a depression is a pointless fight with the future. Governments try to restore the old economy - as it was. They prop up the old industries. They bail out the failed executives and speculators. They pass out money to people, encouraging them to make more of the same mistakes that got them into trouble in the first place.
However there is no going back, creative destruction is required and the only route forward for economic improvement, because this is a depression.
Major credit contraction...and a gross oversupply of capacity are pushing down prices and could do so for many, many years. They can be overcome by aggressive use of the printing press. Argentina and Zimbabwe proved that. But neither Argentina nor Zimbabwe depended on credit from the Chinese. Inflation may be a monetary phenomenon, but hyperinflation is a political phenomenon...the feds only resort to it when they have no choice. And it looks like they get to that point; some time in the future.
The Chinese are watching. They sold already for billions of US dollar based assets in the month of June, is announced today. If it looks like the feds are increasing the inflation rate - thereby reducing the value of Chinese savings - they could send the US government and the US economy into chaos simply by selling the rest of their stash of Treasury bonds.
Nouriel Roubini writes in Forbes Magazine, to explain why:
"Data from the US - rising unemployment, falling household consumption, still declining industrial production and a weak housing market - suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.
"Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.”
"The first reason is likely to create a long-term drag on growth: Households need to deleverage (pay down debt) and save more, which will constrain consumption for years.”
"Second, the financial system - both banks and non-bank institutions - is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.”
"Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.”
"Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth."
Roubini thinks the United States will climb out of recession towards the end of the year...but then, it could fall back into a 'double-dip' (WW-shaped) recession. Maybe he will be right. Maybe this downturn will resemble Japan's multiple recessions over the last two decades. Or maybe it will be a single, deeper and longer lasting slump - like the one in the early '30s. Either way, it should be thought of as a depression, not a recession, because it is fundamentally different. And the difference is: that RECOVERY is IMPOSSIBLE.
If the markets were to recover, it means they need to go back to the way they were. The economy can't go back to what it was. In the 2005-2006-period it was in the sequence of a credit cycle blowout, where it took more than $5 of new credit to produce one extra dollar of output. In other words, consumers had to borrow $100, to get GDP $20 up.
A recession is temporarily, like catching a cold. It recovers shortly afterwards. But a depression is incurable. There is no going back. Consequently there is no recovery.
Trying to 'recover' from a depression is a useless fight with the future. Governments try to restore the old economy - as it was. They prop up the old industries. They bail out the failed executives and speculators. They pass out money to people, encouraging them to make more of the same mistakes that got them into trouble in the first place.
Logic and analytical minded managers should be put in charge otherwise an economic disaster will be the result.
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