In my essay ‘EU Today and Tomorrow’ I wrote: “The failure to agree on orderly debt reductions led to disorderly defaults, tariff wars and further worldwide collapses of production and employment in 1931, the last Great Depression.” Today an article written by Bill Bonner about depression is worth the reading. It explains in detail the pros and cons about depression, and how the economy is repaired.
“Trying to fix a depression it is not only expensive.... The US government spends $1.60 for every $1 it receives in taxes. This is a recipe for a disaster, not for a recovery. It actually prevents a real recovery from happening, by blocking the market’s natural self-healing system.
The cure for a depression is a depression!
A depression reduces asset prices, consumer prices, and interest rates. This makes it possible for investors and business people to redirect their efforts on projects that will work. For example, a car wash may not be a good investment at $100,000. But at $50,000 it might produce good cash flow.
An investment may not make sense if you have to borrow money at 6% interest. But at 3%...the numbers work.
In an ideal world the price of labor falls too. You may not be willing or able to hire extra workers at $10 an hour, but how about at $5? Trouble is, the feds interfere with these self-healing trends. Minimum wage laws prevent employers from taking advantage of low-quality labor at low prices.
Unemployment compensation keeps workers from discounting their own labor. Zero interest rates and bailouts keep the zombies on their feet. Even in the best of circumstances — that is, in a free market — labor rates tend to be “sticky.” They don’t adjust quickly. With the CBs applying so much glue, it’s amazing if they can move at all.
But eventually, a depression works its magic. Prices fall. Investors are wiped out. Businesses go bust. The ‘destruction’ of the capital stock frees up both money and labor for new applications. The ‘creative’ part can begin.
Not this time. The feds have created darkness without a dawn. The glass is 100% empty. There are plenty of clouds, but no silver linings.
There are now more than 6 unemployed competing for every job. A normal recovery would see in the US the economy adding about 500,000 new jobs a month. Instead, last month it added 120,000 and economists hailed it as a major victory. Of course, it needs to create 150,000 jobs just to stay even with population growth. As it is there are 7 million fewer jobs today than there were in 2007... and the number of unemployed people is growing.
In 2007, just 10% of the unemployed had been jobless for 6 months or more. Today, the total is 40%. And with so little growth in the job market, many of these unemployed people will never work again.
What’s the problem?
Truth is, no one really knows. The simple explanation is that there’s a correction going on. But even before the correction, decent jobs were disappearing. The recession of 2001 was followed by the first “jobless recovery.” But every recession since the 1970s has been succeeded by a weaker and weaker recovery.
The feds don’t really have any idea why this is. Every politician and policy wonk suggests the usual remedies — more education, retraining and infrastructure investment. But there is no evidence that any of these things would really make the job picture much better.
The education industry has been a money pit. Huge amounts of money have been “invested” both by parents and the governments. It doesn’t seem to have helped the economy very much. True, a college grad is more likely to have a job... but only because he’s taking it away from someone without one.
The unemployment problem is a “tough nut to crack,” says The Financial Times.
Of course, we could fix the jobless problem overnight. But people wouldn’t appreciate it. We would simply remove all subsidies for unemployed people ... and all restraints on hiring. Labor prices would fall fast. Within days, we’d have full employment again.”
In fact the whole financial crisis would have been solved by now with less pain, as the Fed under Mr. Greenspan during the recession of 2001-2 applied the easy money policy to avoid depression. His Keynesian approach of money printing created the housing boom and bust and brought the global economy down initiating the financial crisis that begun with the Lehman Brother collapse, it was the beginning of the malaise as is known today.
The fundamental problem in the most troubled European countries is that the debt burden is growing at a faster rate than their economies are. Markets are losing faith in the economic viability of countries and soon will see the risk as too high to continue lending. This is the reason why sovereign debt has reached unsustainable levels within the PIIGS.
Direct and indirect bailouts have made the debt bubble bigger, bringing forth a strong possibility that these unsustainable levels of borrowing will force countries to leave the Euro zone. The default crisis will probably end up changing the makeup of the EU by the end of next year - a stronger zone with Germany as its backbone, could be a possibility?
Recapitulating, an economic depression is a good thing. It does away with bad investments and gets rid of bad speculators. It forces capital into more productive, more profitable applications. It kills off zombie industries. It retires worn-out industries ... and it reduces costs so that new industries can arise. It’s the ‘destruction’ that Schumpeter’s ‘creative destruction’ needs.
The more you think about it, the more you’re beginning to appreciate this coming depression. After rip-off bailouts and bogus recoveries, a depression would be something to look forward to.
Tags: Great Depression, depression, EU, Europe, unemployment, job losses, economy investments
“Trying to fix a depression it is not only expensive.... The US government spends $1.60 for every $1 it receives in taxes. This is a recipe for a disaster, not for a recovery. It actually prevents a real recovery from happening, by blocking the market’s natural self-healing system.
The cure for a depression is a depression!
A depression reduces asset prices, consumer prices, and interest rates. This makes it possible for investors and business people to redirect their efforts on projects that will work. For example, a car wash may not be a good investment at $100,000. But at $50,000 it might produce good cash flow.
An investment may not make sense if you have to borrow money at 6% interest. But at 3%...the numbers work.
In an ideal world the price of labor falls too. You may not be willing or able to hire extra workers at $10 an hour, but how about at $5? Trouble is, the feds interfere with these self-healing trends. Minimum wage laws prevent employers from taking advantage of low-quality labor at low prices.
Unemployment compensation keeps workers from discounting their own labor. Zero interest rates and bailouts keep the zombies on their feet. Even in the best of circumstances — that is, in a free market — labor rates tend to be “sticky.” They don’t adjust quickly. With the CBs applying so much glue, it’s amazing if they can move at all.
But eventually, a depression works its magic. Prices fall. Investors are wiped out. Businesses go bust. The ‘destruction’ of the capital stock frees up both money and labor for new applications. The ‘creative’ part can begin.
Not this time. The feds have created darkness without a dawn. The glass is 100% empty. There are plenty of clouds, but no silver linings.
There are now more than 6 unemployed competing for every job. A normal recovery would see in the US the economy adding about 500,000 new jobs a month. Instead, last month it added 120,000 and economists hailed it as a major victory. Of course, it needs to create 150,000 jobs just to stay even with population growth. As it is there are 7 million fewer jobs today than there were in 2007... and the number of unemployed people is growing.
In 2007, just 10% of the unemployed had been jobless for 6 months or more. Today, the total is 40%. And with so little growth in the job market, many of these unemployed people will never work again.
What’s the problem?
Truth is, no one really knows. The simple explanation is that there’s a correction going on. But even before the correction, decent jobs were disappearing. The recession of 2001 was followed by the first “jobless recovery.” But every recession since the 1970s has been succeeded by a weaker and weaker recovery.
The feds don’t really have any idea why this is. Every politician and policy wonk suggests the usual remedies — more education, retraining and infrastructure investment. But there is no evidence that any of these things would really make the job picture much better.
The education industry has been a money pit. Huge amounts of money have been “invested” both by parents and the governments. It doesn’t seem to have helped the economy very much. True, a college grad is more likely to have a job... but only because he’s taking it away from someone without one.
The unemployment problem is a “tough nut to crack,” says The Financial Times.
Of course, we could fix the jobless problem overnight. But people wouldn’t appreciate it. We would simply remove all subsidies for unemployed people ... and all restraints on hiring. Labor prices would fall fast. Within days, we’d have full employment again.”
In fact the whole financial crisis would have been solved by now with less pain, as the Fed under Mr. Greenspan during the recession of 2001-2 applied the easy money policy to avoid depression. His Keynesian approach of money printing created the housing boom and bust and brought the global economy down initiating the financial crisis that begun with the Lehman Brother collapse, it was the beginning of the malaise as is known today.
The fundamental problem in the most troubled European countries is that the debt burden is growing at a faster rate than their economies are. Markets are losing faith in the economic viability of countries and soon will see the risk as too high to continue lending. This is the reason why sovereign debt has reached unsustainable levels within the PIIGS.
Direct and indirect bailouts have made the debt bubble bigger, bringing forth a strong possibility that these unsustainable levels of borrowing will force countries to leave the Euro zone. The default crisis will probably end up changing the makeup of the EU by the end of next year - a stronger zone with Germany as its backbone, could be a possibility?
Recapitulating, an economic depression is a good thing. It does away with bad investments and gets rid of bad speculators. It forces capital into more productive, more profitable applications. It kills off zombie industries. It retires worn-out industries ... and it reduces costs so that new industries can arise. It’s the ‘destruction’ that Schumpeter’s ‘creative destruction’ needs.
The more you think about it, the more you’re beginning to appreciate this coming depression. After rip-off bailouts and bogus recoveries, a depression would be something to look forward to.
Tags: Great Depression, depression, EU, Europe, unemployment, job losses, economy investments
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