Occurences Within Economy Consistent With a Depression

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“How can you keep talking about a depression,” asks a Dear Reader, “when the economy is clearly recovering just as it should be.”

Ah ha! We’ll explain in a minute.

First, the latest from Wall Street: The Dow fell 18 points yesterday. We’re still not sure whether the final, fading phase of the bear market has begun or not. This bounce took the Dow back to 10,725 on January 19th. It hasn’t seen that level since. Was that it? Was that as high as it’s going to get? Is it down from here on out… until the Dow finally bottoms out somewhere south of 5,000?

We don’t know. We’ll just have to wait to find out… along with everyone else.

Now… back to that ‘recovery’…

It’s true that there are some signs of “stabilization.” The unemployment rate is not getting badder as fast as it was a few months ago. And house prices seem to have stopped falling – for the moment.

It’s also true that the economy managed to register positive ‘growth’ in the last quarter… mostly thanks to government spending and inventory restocking.

The trouble is, all of these things are consistent with a depression – especially a depression that the feds are fighting every inch of the way. In the 1930s, there were several years of growth… and there were great years for the stock market too. Then, things fell apart again. The nation ended the ’30s not one penny richer than it had been when it began them.

And Japan has seen some good years and some bad years, too, since its depression began in 1990. Oddly, Japan’s population is falling… so in per capita terms, Japan’s downturn hasn’t really been so bad. Per person, the Japanese got richer over the last 10 years.

It’s also true that here at The Daily Reckoning, we use the term ‘depression’ a bit differently than most economists. Most economists believe GDP growth represents increasing prosperity. They think a depression is merely a recession, with negative GDP growth, that lasts longer and goes more deeply than normal.

Our definitions are better:

A recession is a pause during a period of growth. A depression marks the end of the period of growth… giving the economy a chance to make adjustments so that a new period of growth may begin.

GDP growth alone is a fraud. The gross number just doesn’t tell you anything worth knowing. It doesn’t really matter how fast an economy is growing. What counts is how fast it is growing per person… and whether that ‘growth’ is real or phony.

Growth is not the same as prosperity…

Someday, we promise you, modern economists will be ranked below doctors who bled their patients to death and jungle tribes who threw maidens into volcanoes. They are quacks.

These imposter economists think they can fix a recession and prevent a depression. When the private sector stops spending they urge the public sector to step in and replace the missing private spending. That, in a nutshell, is Keynes’ theory.

A nutshell is the appropriate container. Because there’s a world of difference between private spending and government spending. Private spending is voluntary; people choose to spend their money on things they really want. When the government spends, on the other hand, it is merely squandering stolen property. It may look like private spending. But it’s not at all the same thing. You can hand out checks to people; it’s not the same as when people earn money. You can build bridges and airports too… but they are only valuable to the extent that they are used efficiently. And you can hire all the government employees you want; they don’t necessarily add to the sum of human happiness or wealth (most likely they subtract from it!).

Just look at societies that put everyone to work. There was no unemployment in Cambodia under the Khmer Rouge! Or in the Soviet Union. North Korea is another good example today. They all show that putting people to work for the government doesn’t make them rich… it makes them poor.

Yet, these modern economists – Martin Wolf at The Financial Times, Paul Krugman at The New York Times, Bernanke, Summers and Geithner in Washington – believe that they can control and cure a depression. All they have to do is to keep the GDP expanding… and keep unemployment from rising. How? Just spend money!

The GDP calculators can’t tell a phony expense from a real one. Whether the government spends money to do something that is not worth doing… or hire someone who is not worth hiring… or just gives away money to someone who is not worth giving money to… the GDP quants don’t know the difference. They think one dollar spent is as good as any other…

… even if it is a dollar that didn’t exist! (Don’t get us started on that one… )

And who knows if a job is worth doing? Only the person who pays for it. That’s the trouble with government employment; the people who pay the bills don’t make the hiring decisions.

Modern economists don’t even bother to think about it. All they care about is the unemployment rate… not about whether the job is actually useful or efficient. Want to boost the job rate? Easy. Just hire people. Does this make people better off? Of course not.

The Financial Times had a full page in its Wednesday edition devoted to China’s empty towns. Bloomberg has been on the story too.

It is the story of what actually happens when government meddles in an economy.

Last year, China ordered its banks to lend money to infrastructure programs in order to offset the worldwide financial meltdown. The banks responded, doubling their lending.

Observers in the West were stunned… and envious. If only we could ‘get things done’ like that, they lamented. If only our governments had more authority and control over the economy!

But let us go back a year and put ourselves in the shoes of the bankers. They must have had loan requests. Some of them they must have judged worthy of funding, others not. But how was it possible that the number of project deemed creditworthy doubled in the space of a few months?

Well, it didn’t happen. Instead, the Chinese government merely changed the rules of the game. The banks, under pressure to loan out money, reacted by lending it out… to marginal projects. Now, we’re beginning to read about them in the paper – mostly towns without any people. Just wait until China blows up. Then, we’ll read about banks without money. Stores without customers. And businesses without a prayer.

China is either going to blow up… or slow down.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. Oh no captain i think shes gonna blow,if china blows run for the lifeboats people.As each day passes this seems to be the only result, the west is bankrupt cant afford china”s goods china will start to run out of money with less income and more stimulus ,deflation can be the only result i think doesn”t look good for anyone for a while just a matter of time.

    tic……..tic……..tic……..tic………BOOOOOOOOOOOOM.

    Reply
  2. Bruce. this is no joke do you understand what this will do to peoples lives it is no joke grow up!

    Reply
  3. yes, yes, yes china is a banrupt commie country and can’t survive another five centuries. while, on the other hand, america the “greatest, freest, richest, all powerful” 235 year old country is destined to bankrupt the crap out of anybody and everybody stupid enough to keep listening to all the jive talk….

    yes, yes, yes: WHIP INFLATION NOW
    STAY THE COURSE
    CHANGE YOU CAN BELIEVE IN

    hey, we know who’s in charge of the USS TITANIC, and we heard it before, and before, and more and more….

    GIVE US GOLD and not more of the paper stuff: ‘not worth a yuan’….

    Reply
  4. Without sounding to niaive, how real is the prospect of China having a melt down, mini or great??

    It seems weird to someone form the outside looking in that economists and governments who are knowledgable in the fact that these ‘red flags’ exist still plough on like everything is okay. All the while they do this in a way that exacorbates the final deteroration of each others economies.

    It seems to be pointless, as painful as it would be they should have just let the whole thing collapse and then get on with rebuilding it. It appears to be thats what will eventuate we are only prelonging and making worse the inevitable.

    Reply
  5. There can be no doubting now that the world wide economy will soon collapse. The time to prepare is now, because there aint much time left. Buy gold and silver and food. You need to buy food too. Then it wont matter as much to you when inflation hits and food prices rise.

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  6. Ozzie, it’s kind of like chess. At some point in the game it may become clear you can’t win (unless some unforeseen event occurs), but you still have to play the game, hoping that, by luck, the opponent will stuff up. Economists in China are not completely at liberty to do the right thing, and as much as they would like to think otherwise, the nation’s success is tied to the fates of its neighbours.

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  7. Bruce: “…the west is bankrupt cant afford china”s goods…”

    It’s probably more accurate to state that the US, the UK and U-rope are bankrupt and can’t afford China’s goods… or anyone else’s. Crossing Canada we found that consumer demand for Chinese goods persists. The same is true for much of Asia… and also in Australia and NZ. Woolworth’s record profit confirms that consumer demand is actually rising in countries which have been largely unaffected by the GFC.

    Now that the worldwide situation varies so radically, it’s important that bloggers identify their locations. Good to see this happening more. While there must be some drift of global fallout south, Australia’s situation is markedly different from that of Baal’s “USS TITANIC” and the sinking U-boats in the north.

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  8. 2 Headline Feature grabs from the Financial Review:

    Wall Street edges higher on economy

    US stocks rose on Friday, capping their best monthly advance since November as data showed the economy grew a tad better than expected in the fourth quarter.

    Economy in doubt as jobless queue grows

    A surge in jobless claims and a slump in orders for durable goods have sparked fears the United States’s economic rebound has become unhinged.

    Both are at odds with each other… if the so called experts do not have a clue, how can the rest of us be expected too.

    Read all available information, read trends and issues that effect economies that will most effect ours and form YOUR OWN OPINION and make decisions based on that, blame no one but yourself if you get it wrong..
    or put you fate in the hands of an advisor.. but there are risks and no guarantees in life besides death and taxes…

    Stillgotshoeson
    February 28, 2010
    Reply
  9. “if the so called experts do not have a clue”

    The so-called experts are on someone’s payroll to spin a favorable story. Unfortunately, only bloggers are allowed to express themselves on these topic matters. There were many real estate and equity bubble blogs since 2003. Most people didn’t read any of them and today, are astonished that things are as bad as they are. Profligate lending practices have been around for years; it doesn’t take an expert to figure out that things will end badly. Before the real estate bubble, typical mortgages and rent payments were within a 1 to 1.3 ratio, and then, all of a sudden it shot up to 2 to 4. Was that sustainable? A lot of bubble blowers thought that it was, where 70%+ of a family’s income was going to cover the carry costs of the real estate bubble because “they weren’t creating more land”.

    Next, since when was housing the best way to invest for a productive modern economy? It clear wasn’t; it’s a sinkhole of wasted capital which could have been used to either conduct R&D on new materials or solve basic maintenance issues like collapsing bridges/tunnels. All and all, the experts here don’t appear like expert but more like propagandists for lending institutes and their friends in govt.

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  10. Randy, the collapse of property in the US and the UK is largely explained by unsustainable banking practices.

    In the US, these included NINJA loans. What Australian bank would lend to a family which had no income, no job? (And no prospect of meeting loan repayments… .) Your banks’ solution, to onsell these risky loans to the rest of the world, was a _criminal_ action. Few of your fellow Yanks have been called to account for their larceny. Many walked with immense bonuses.

    In the UK, banks encouraged double mortgages (to allow families to buy luxury cars, holiday homes in Spain, France and Portugal, etc) based on inflated equity. They then encouraged debt consolidation, or rewrapped new loans covering all debt. Less criminal in intent, but equally disastrous.

    That final practice, debt consolidation, is the closest we’ve ever come in Australia to your northern hemisphere sinkhole, Randy. Any Aussie who buys that kind of product, at higher rates, is indeed headed down the trail towards bankruptcy. And any bank promoting that kind of financial solution is asking for trouble further down the road.

    All very well for expert US economists like yourself to pose ‘coulda, woulda, shoulda’ strategies in hindsight; and blame your sinkhole on housing, rather than your corrupt financial institutions. Clean up your own fetid mess in the US before you tell Aussies what to do, son…

    Biker Pete
    March 2, 2010
    Reply

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