Depression: A Time of Falling Prices

The depression is alive and well, thank you.

The Dow rose 91 points yesterday. Gold fell $6.

Officially, the crisis is over. Everyone says so. Central bankers and Treasury officials have been congratulating themselves. It's been a year now since the end of the world didn't happen. These fellows take credit for it.

Bernanke said yesterday that he'll keep the monetary spigots wide open for a while longer...but that's just because the recovery is fragile. He also talks of an 'exit' from stimulus programs, now that the economy is getting back on its feet.

Claptrap! Balderdash! Flimflam!

The mainstream economics profession is guilty of dereliction of duty. They should be telling people that this 'recovery' is a scam. They should be warning investors that the markets could fall apart any day. They should be buying gold and selling US Treasuries...and explaining to the politicians that you can't buy your way out of a depression with phony dollars squandered on wasteful projects!

Instead, the dopes are patting each other on the back...praising themselves for saving the planet from destruction.

But what really has gone on? And what's going on now?

Glad you asked.

First, there is a real economic phenomenon going on - the depression. It's alive and well...and doing just fine. Households are de-leveraging. Businesses are building up cash. People are losing their jobs. Savings rates are edging up.

Almost everything is happening as it should.

Depressions are times of falling prices. Markets are always discovering what things are worth. In a depression, they find that assets - stocks and real estate primarily - are not worth nearly as much as people thought.

That's why we have our 'crash alert' flag still flying. Prices are vulnerable to sharp, unannounced drops until they finally get down to real depression levels. Since that hasn't quite happened yet...we figure it's still to come.

On the employment front, this depression has put more than 6 million people out of work. And every month, more people join the unemployment ranks. So far, so good. The US economy didn't need so many marble countertop installers and so many mortgage refinancers. (If only something could be done to get rid of lobbyists!)

But the worst thing about a depression is that it holds jobless people prisoner for so long. Many of them will become lifers...they'll never work again.

In that regard, this depression is similar to Japan's 20-year depression, 1990-2010. After the bubble burst, the Japanese...who were aging faster than any race ever had...figured they needed to get serious about saving money. So, they cut back on spending...and saved. Domestic spending collapsed. Fortunately, the rest of the world - especially Americans - were still spending their fool heads off. And Japan is an export-led economy. Even so, with its own consumers dragging their feet, the Japanese economy didn't go very far or very fast.

The Japanese put their vast savings, directly or indirectly, into Japanese government bonds...helping the government fund its massive stimulus programs. Of course, the stimulus programs were a waste of money. The economy never really recovered...and now the government is expected to have gross debt equal to 200% of GDP next year, according to the IMF.

For reference, the US is expected to reach 100% of GDP next year. Britain is hard on America's heels with debt at 94% of GDP.

And now Americans are entering retirement savings mode too. The biggest age cohort - the boomers - need to do some fast saving in order to finance their retirements. They're cutting back...not just temporarily...but permanently. They will never, ever again spend money like this did during the big bubble years 2003-2007. That's what makes for a durable depression...

Another thing that makes for a depression is a lack of lending. Bank credit is still falling. Households cut back because they need to get out of debt...and save money for retirement. Businesses cut back too. New projects typically don't do well in a depression. Small businesses struggle...and fail. Big businesses get bailouts and subsidies. Depressions are times to neither a borrower nor a lender be.

Debt is only increasing at the government level. But that's another story for another day...

Regards,

Bill Bonner
for The Daily Reckoning Australia

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