Thursday, November 3, 2011

An attempt to make sense of "it".

What is "it"?  It is the current situation in our National Economy.  I am often overwhelmed with the explanations offered by economists.  The blathering of most politicians who are reading from canned speeches never makes much sense to me either. So, I will once again attempt, with the aid of Monty Perelin's article from an October 31st edition of the American Thinker, to give some insight.

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living.[1][2]  Wikipedia.

This is a simple explanation and is more than enough for me.  If you are given to finding out the three methods of determining the GDP, then go to Wikipedia and read the entire piece.  The following comments will be from the article I mentioned.  The sections in quotes will be those of Monty Perelin and the others will be mine.  Monty's entire piece is also worth reading.

"We are headed for an event that history will record as worse than the Great Depression. It is unavoidable."

"The principal reason for the dire prediction is the level of debt outstanding. Current debt levels are simply not sustainable. Assets and cash flows cannot support or service this debt."

"As a percentage of GDP, debt is at an all-time high. Immediately prior to the Great Depression US debt was about 200% of GDP. It rose briefly to 300% as a result of massive government interventions to combat the Depression"

"From 1870 forward, debt levels are generally in the range of 150% of GDP. That appears to be the norm for the last 140 years. Only in the 1920s and recently did debt exceed 180% of GDP. Even funding World Wars I and II did not drive debt above 180%."

"To return to 150% requires a reduction of about $30 Trillion in debt. That represents about two full years worth of GDP."

What then was the government's response in the 1930's and what is the response of the current Democrat led response today?

"After the 1930s politicians convinced themselves and the public of two things:
  1. Free markets need government interventions to produce a healthy economy.
  2. Keynesian pseudo science provided the tools necessary to manage the economy.
Both beliefs were false, but both aided politicians' insatiable drive for power and control. Once the public came to believe these myths, government owned the economy. Any economic problem became a political one. Economic slowdowns were no longer politically acceptable.

"Don't just stand there, do something" drove economic policy. It was politically impossible to allow an economy to correct on its own. Political action was required, even if such activity was ultimately harmful. Politicians had to do something, anything! Their constituents demanded it.

The "government is responsible" attitude quickly spread. Today, virtually any perceived problem or inequity is assumed to be fixable by government. Government readily took on responsibility for virtually every aspect of our lives.

The madness is evident. It is assumed that government creates jobs, educates kids, designs toilets and light bulbs. It is necessary to provide mortgages, retirement benefits and healthcare. "Green energy" and other new technologies are assumed impossible without the assistance of government.
This litany of the presumed need for government could continue for pages. Virtually all these presumptions are false. Worse, many in the public still believe that these "services" are "free."

"Every swing in the business cycle, no matter how mild, became the responsibility of government. Government was to step in and "fix" economic problems. Seventy years of such "fixes" preceded our current problem.

Economic downturns are both normal and necessary. Individual and business mistakes are remedied via economic slowdowns. Misplaced capital and labor is freed up for more productive uses. When this cleansing does not occur, an economy becomes less efficient and grows at a slower rate. The mistakes remain in place and are perpetuated.

Government intervention is not corrective. It is a cover up of prior mistakes. The phrase "pretend and extend" describes what happens. Instead of allowing the economy to correct, government attempts to avoid the correction and the pain by covering up the mistakes. That has been the history of much of the last 80 years. Continued interventionism brought the economy to this crisis point.

The artificial boom that began decades ago is exhausted. Response to the dot-com stock market bubble was the last coverup that "worked." The system was flooded with credit and one bubble was replaced with another. Now the housing bubble has burst, marking the high point of "pretend and extend."

Credit expansion since 2008 has been impotent. The real economy has stopped responding. Economists who advocate more stimulus or credit are either ill-trained or have political motives. Governmental stimulus and credit expansion created the problem. Recommendations for more of the same qualify as insanity per Albert Einstein's definition."

"The current credit bubble is bigger than the one that preceded and caused The Great Depression. Consumer and government balance sheets are worse than they were eighty years ago. Income is incapable of supporting current debt levels.

Reducing debt to manageable levels will produce another Great Depression, likely greater and more painful than the original. Debt reduction requires lower spending and higher savings. Large amounts of debt will not be paid and will be liquidated via defaults.

Until now, governments have done everything to prevent this natural process from occurring. According to Dalio, governments have "no more tools in the tool kit."

1 comment:

  1. Sorry about the appearance of the text in this post, but the new and better format of "Blogger" doesn't allow me to see the finished product like it used to. Pappy


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