The World has too much of everything

Despite the urging of governments, Americans and Europeans cannot be expected to take on more debt in order to continue consuming more stuff from China. Nor can the Chinese reasonably expect to work themselves out of an overcapacity problem by creating more of it.

But officials in the East and West seem equal in their moral ignorance. They don't seem to think very seriously about this indisputable fact. On one side of the Pacific, the Americans think they can bring a recovery by encouraging consumers to borrow and consume more stuff. On the other side, officials offer credit to entrepreneurs and industrialists - encouraging them to build more factories and add more capacity so they can make more things. Neither seems to realize that the real problem is that the world already has too much of everyhing

In the West, the private sector has enough of debt. But along come the Feds and Central Bankers to borrow and spend until the printing presses are run down. When it comes to self-destruction, the feds and CBs won’t stop easily.

They're borrowing and spending trillions - $10 trillion is to be added to US debt over the next 8 years. So far, this money has done nothing to relieve the underlying problem: the consumer has too much debt and too little income. The government can give him a tax rebate, or give him a check for a clunker. These giveaways will produce a temporary boost. But when the giveaways give way there is nothing left. Does the guy who bought a car with government cash in 2009 buy another one in 2010? Does the fellow who brought his mortgage up-to-date with a tax rebate in 2008 go out and buy a new house in 2009?

The problems are real - at the heart - of the real economy. These aren’t problems that can be solved by tricking the money supply, interest rates, or even fiscal policy. These are problems that need to be solved by the real economy - in the real economy itself - by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world - adapting their capacity so as to produce things for people who can actually afford to buy them. It's a long process, with numbers of bankruptcies and disappointments along the road.

This process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery, and no possible return to the old model. Expect more layoffs, more foreclosures, more cutbacks, and so on. There only will be more depression that will be around for many years to come. Better adapt yourself today than tomorrow.