Friday, January 6, 2012

Feel like the recession never ended? That’s because we’re still in one

“Why does it still feel like a recession? Economist Richard Koo has a simple explanation (pdf below, via Krugman): We’re still in a recession. “

This kind of recession Koo is talking about is not a technical recession. After all, the economy is technically growing — slowly, imperceptibly, like the turning of the earth. But upon closer inspection, we’re in a shadow recession he and other economists call a “balance sheet recession.” That means that just about everybody in the Western World — households, corporations, and sometimes even governments — is focused on paying off our balance sheets (i.e.: paying off debt) at the same time. That’s nice for our balance sheets. But it’s a horrible way to jumpstart a weak economy.

First up: The United States. In the years after the tech bubble, the U.S. economy relied on Americans buying more houses — and more expensive houses — than ever before. Today, Americans are buying the fewest number of homes in 60 years, a fifth of homeowners are underwater, and savings rates have shot up. Deleveraging created a whopping 9-percent-of-GDP shift toward savings in the private sector. Meanwhile, the public sector’s borrowings offset only about two-thirds of that shift.

It’s the same song in Great Britain. Households borrowed their way through the 2000s. Recession hit in 2008, and the private sector swung massively toward savings more than the government swung toward borrowing.

In Spain and Ireland, the shift has been even more staggering, but the upshot is the same: private sector de-leveraging reached about a fifth of GDP in both countries. Source: (1) The Atlantic News

Recessions are necessary

Recessions are necessary to clear the excess credit that gets built up in the “good” times. Governments and Central Banks should acknowledge this, and allow minor recessions to occur in a more controlled manner (ie when there are still fiscal and monetary options to counter the recession). Instead, absolutely everything that could be done to prevent a “recession” (vis a vis fiscal and monetary policy) has been done, and the economy is painted into a corner. These policies make a bad situation worse. The Germans and French know this, and are thus reluctant to pour more of their hard earned money into the hole that has been dug. At the end of the day, someone has to take the loss for the excess debt.

If this was a garden variety run of the mill inventory adjustment recession, they would have a shot at a sustainable recovery but it isn’t.

A credit correction is a different beast, as witnessed by the trillions spent globally towards a recovery but produced little more then unsustainable surges and pull backs. Governments have over leveraged their tax paying electorate through useless stimulus and by taking on once privately held debt/risk, that is now placed on the sovereign balance sheet. (BTW:The largest shift of wealth mankind has ever witnessed and we are being lead to believe that it’s all the fault of our social safety net.)

Creative destruction dictates that there is a need to unwind and in some case’s let lapse over capacity, in order for remaining (or new) capacity to be re distributed. Continuing to prop up unsustainable excess capacity only locks you within a Japan-like, negative feedback loop; of which their is little chance of escape. Indeed, inflating away someones debt also inflates away someone else’s savings. A borrower can’t exist without a lender.

The long term economic stewardship of Government created this mess with fake free trade and by building the China/India nightmare! Also, we should not forget the repeal of Glass-Steagall banking act in the US which led to governments bailing out commercial accounts’ bets. Re-balancing world trade has to be first, or country after country will fall without the wealth generating jobs to sustain real growth!! Governments have never had the power to avoid recession but they can lessen the pain during a down turn. The real crime is the disappearance of jobs that wil not return in recovery as they are all in other countries now.

Currencies the problem?

Debt based fiat currencies suffer a very fundamental flaw in that the amount of currency must continually increase to pay off the interest from previous borrowers. The increase in quantity of the currency shows up as what many people call price inflation although that is just an effect of monetary inflation. Gold, without fractional reserve banking, does not have this problem. The default in 1971 was inevitable and was only hastened by the previous uncontrolled spending. Prior to the 1977 default was the 1933 default when the US government dropped the value of its currency from $20.67 per ounce to $35 per ounce of gold. Just prior to that the US confiscated the gold of it’s citizens and made it illegal for them to own gold.

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