By Dave Schudel and Jack Benz
Back on October 28, almost a year ago, I wrote that the politicians, bankers, and economists had it all wrong and, like it or not, we were in a full scale depression, with the attendant deflation. We called it the ‘D words’.
Of course everyone took the opposite position that we were in nothing more than a normal recession, and that in six months we would come out of what they were even unwilling to call an economic crisis. Well I guess they underestimated the severity of their so-called recession, as two years after it started, we are still nowhere near a recovery.
The definition of a recession is a short-term downturn in the economy caused by an overheating of the business cycle coupled with over-production, inflation and a sudden drop in consumer demand.
Recessions, if left alone, self-correct, shake out the economic problems, and things get back to normal in 6 to 12 months; 15 at the outside.
On the other hand, a depression is a severe economic fall caused by a completely abnormal dislocation of the economy. It is a combination of an excess of credit expansion causing both public and private debt to balloon beyond the economy’s ability to absorb this debt overload. This causes a lack of liquidity (money) to meet the increased debt, which causes runs on banks and financial institutions who can’t meet the demand for cash. This turns into bankruptcies, foreclosures, job losses, decreased sales and earnings, etc., etc. I don’t think I need to go on about what happens, as you have all witnessed the results over the last two years.
In simple terms a depression is a recession with no bottom, caused by an economic system that has just run out of steam and has no fuel to fire the boiler. An economic system that cannot be brought back to life is, in a word, DEAD, and no amount of resuscitation can bring it back to life.
What economists, bankers and politicians are unwilling to accept is that you cannot spend your way to prosperity when you are bankrupt. We are all going to have to accept the reality that the Good Times are over, and we are going to just have to hunker down and start all over again. There never was a “free lunch” and we will now have to learn that hard lesson the hard way.
The Obama administration is trying to create a soft landing for the economy after it jumped out of a plane with no parachute. The only problem with a soft landing is that recovery from this crisis is going to take ten to fifteen years instead of recovering strongly after the two years already suffered. A soft landing is a coward’s way to make the public believe in the tooth fairy but, sadly, everything is not going to turn out alright.
The difference between the soft and a hard landing is that if we had accepted the pain when this all started, instead of accepting a shot of economic morphine, the long term would be a lot brighter. But you know politicians don’t want the public blaming them for bad times as they need to get re-elected, don’t they?
So what now is the problem? It is DEBT, and the realisation that there is no way in the world we will ever be able to pay off the public and private debt that has been run up. One way or the other, we will have to write off the debt as uncollectable. This can be done the slow and painful way (which is the way government has chosen), or the quick and more immediately painful way and just get it done. Either way the debt will have to be written down or written off as there is now no other way to go If you like pain then spreading it out over the next decade or two may be your chosen way to suffer. It’s not mine.
If you believe the media, then you will believe that the economy has hit bottom, and we are now on the way out. However, the Great Depression had its bounce in 1930–32, and the market actually recovered 50% of its losses, only to turn right around and lose all of that gain and then more. We have so far recovered 45% of the loss this time around, will history repeat itself?
If the US economy is recovering then, answer for me the following questions.
- Why does unemployment continue to increase month after month without stopping? 6.7 million and counting.
- Why are all sectors of the economy showing reductions in business and sales every month?
- Why are earnings of business in all sectors decreasing every month?
- Why have bankruptcies and foreclosures hit a record high in July, making a record 3 out of the last 5 months?
You can prove anything if you torture the numbers enough. Just try telling the person who has just lost their job, looking for a new one, lost their home or trying to sell or refinance their present one, that the recession is over. You know what their answer will be.
Since 1945 the US economy has been supported on the shoulders of the consumer. At first they spent all the money they earned and saved during the war. Then they spent money they earned in the big boom of the 50s and 60s. Then they figured that they could spend money that they hadn’t yet earned by borrowing on their future earnings. This increased the US debt from 120% of gross domestic product in the 70s, to 370% of GDP in 2007. At this rate the debt could easily climb to 400 or 500 percent of GDP. Now you know why I say the debt can never be repaid and will have to be written off.
Through all of this the Fed’s answer has been to offer the consumer more cheap money to continue spending. The consumers have now dug in their heels and refused to run up any future debt. They are saving 7% of earnings for the first time in 10 years and paying off personal debt.
The Fed hasn’t given up. They have lowered the interest rate to practically zero and introduced stimulus ideas such as a ‘Cash for Clunkers’ programme, giving everyone $4,500 to buy a new car. But the problem is not credit expansion, but credit contraction. There is a radical change in consumer buying habits that will take decades to return to consumption.
Stimulus is of little use as it is working against a major trend in society. At worst it is counter-productive and delays the de-leveraging of the economy. When the government eventually has to stop the stimulus (which it will have to), the economy will react to the reality of the depression by a massive contraction. Let’s hope the soup kitchens and apple sellers don’t return to the street corners.
The reality is something government may not like, but I am afraid they can’t stop it, no matter what they do.
Psst… It ain’t a recession, it’s a DEPRESSION. | 
