Central bankers causing the crisis:
Innovative thinking is required:
There are storm clouds on the horizon in all fields. Consumer confidence has disappeared. When all was purportedly going well, people thought things weren’t true. Now too, they don’t believe things to be true. It is in fact, the exact opposite. Once it was believed people could get richer by the wasteful spending of money that wasn’t theirs, they now turn to their Government for financial support.
First it was thought that this crisis was an economic recession that would only last a year or so, but this recession, now in its tenth year, is turning into a depression. The difference between the two is that a recession is temporary, while a depression is structural. The world has too much production capacity in all fields; cars, electronics, housing, offices, you name it. Structural reform is now essential, reducing manufacturing capacity and affiliated activities. Innovative methods and innovative thinking have to be deployed to forge the change cleverly, with minimal harm.
Central bankers causing the crisis:
This crisis, as with all previous crises, was caused by the central bankers mispricing of the cost of capital, which resulted in misallocation of capital, driven by debt-leveraging that ultimately became exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of unsuspecting people.
First Alan Greenspan, later Ben Bernanke, and now Janet Yellen were all apparently unable to see this entire disaster coming while it was so obvious: culminating in the collapse of the housing bubble and the blow up of the credit market.
Nonetheless Bernanke and now Yellen, still succumb to the view that if you make credit cheaper, you’ll boost economic growth, providing absolutely no proof that the Fed’s purchase of U.S. Treasury bonds and mortgage bonds in QE1, QE2, Q3 did anything to promote growth in the real economy. All they have done is to boost stock prices, making it easier for the U.S. government to finance its deficits.
Central Bankers cannot ‘promote growth’ when households are reducing debt. It is telling that Bernanke has said that the government needs to get its fiscal policy in order (spending) for consumers and businesses to be more confident about taking risks.
Leaders don’t see a solution:
Our leaders apparently still don’t have a clear-cut solution! They just continue throwing taxpayers’ money around. It seems they are in no hurry to put things right, they don’t even take time to investigate what really got us into this mess. They don’t thoroughly analyse the situation to come up with an adequate answer. All they advocate is the application of Keynesian stimulus packages that provoke corruption.
Politicians say they want to create jobs but don’t realise that’s impossible. There is an abundance of practical wisdom around to learn from. But if you put people in charge that created this mess, don’t expect effective solutions, as Einstein once wrote;
“Never expect the people who caused a problem to solve it.”
Simply put; this economy needs to be restructured and not revived.
None of our leaders is able or willing to take bold and necessary decisions. They just apply more of the wrong medicine (money) and they won’t believe or listen to the few that could help. Mr. Market. Clever entrepreneurs are able to adapt to the conditions of a depression that would offer a contributive approach, while the process as it stands could take 10 years or more.
Austerity is the wrong medicine:
Austerity doesn’t work in cutting spending. It results in firing people, increasing unemployment. Budgets are becoming even further off balance, with higher deficits. Decreasing GDP is resulting in more economic misery.
The Russian Kondratieff proved in the ‘30s that economic cycles are more powerful than government, while governments can alter the impact of a smaller “normal” bubble; they are powerless in the wake of a true “Super-Bubble.” The real economic cycle is going to run its course, no matter what the government does.
Real prosperity can’t come until all the “poison” of debt is out of the economic system. The result of underestimating these cycles is catastrophic. It is a force much more powerful than any government can control which will weaken the real economy.
Genuine recovery requires real money:
For genuine recovery, real money in the hands of people who can forge the recovery is required. Real money is needed in de hands of entrepreneurs, family operations, businesspeople, but not the government. For an honest recovery let people keep their money so they can pay their bills, save, invest and spend, whatever they want to do with it.
Depressions are exceptional:
Depressions are quite exceptional though no reliable evidence, statistics or information is available. No general parameters exist because this phenomenon is just too extraordinary. Hardly anyone who experienced the depression of the ’30s, has an accurate recollection of how it was and is able to recall the circumstances that then took place. A depression is not a mere break in an ongoing economy; it is the end of an economic road. It is a situation in which debt must be squeezed out of the system. In these circumstances bailouts, financial aid, and government stimuli packages are inadequate, in fact these hold back the process of recovery. Unfortunately, this viewpoint is comprehended by a mere minority.
During the bubble era people spent too much borrowed money on things they didn’t really need. Once the credit crunch became fact, Policymakers thought money should be spent on anything and everything, just to create jobs, growth and inflation. – However this economic situation is now becoming the “Bailout Bombshell” without solving the underlying economic crisis that will turn into a depression regardless. Tackling a depression as has been previously explained, requires other measures apparently unknown to our policymakers.
Is an Economic Depression really so bad?
The arguments that a depression is bad, are wrong, because they say continuing GDP growth is vitally needed. In a depression people lose their jobs, incomes go down, companies go bankrupt and so forth. In general, people have less money, thus they buy less.
If that were all, it would seem like a small price to pay for the benefits of a depression. In the end, a depression squeezes the debt out of the economy. It gets rid of weak businesses. It turns spendthrift consumers into savers. This must all be worth something.
The major assumption behind these concerns is that in a depression people do not get what they want; they only get what they deserve, so they are disappointed. They become poorer, wear worn off shoes, and drive old cars, but is this so bad in the long run?
In actual fact, what causes a depression? People choose to save rather than to spend. Reduced demand causes a drop in sales, so an increase in unemployment, falling prices and all the other nasty things associated with a ‘depression.’ And yet, behind all this is something people really want – savings. The desire for savings is very real with well-considered concerns. Without savings, people cannot retire comfortably. Without savings, they cannot withstand financial shocks and setbacks. Without savings, they may not be able to take advantage of opportunities that may come their way.
In other words, there is a depression because people would rather have their savings than a new car, or a new pair of shoes, or a vacation. People choose to hoard their own food rather than to eat it. What’s wrong with that? Nothing.
But it causes the economists’ GDP meters to tick over in a direction they don’t like, or at least in a direction they think they can and want do something about. The economists’ answer to this is to let the people have their savings, but authorities can counteract the economic affect of higher savings rates, with increased government spending.
It sounds so simple, so obvious, so balanced. One might almost think it makes sense, if you don’t think deeper about it.
The deeper thought:
Here is the deeper thought: Where do Governments get the money from that they want to spend? They have to withdraw people’s savings. They siphon off the people’s hoarded food! And there you have the problem nailed down. Fresh resources to finance government’s projects have to come from somewhere – for example from profits, return on investments, whatever – and be put to use to generate more money. It is safe to assume that governmental projects are not the angel’s food savers, instead they have an insatiable appetite for funds. Otherwise, they would have proven themselves to be financially self-sufficient and there wouldn’t have been a downturn in the first place.
So, instead of savings and depressions, the people get boondoggles with economic “growth.” Only this isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is food empty on calories, measured as “growth” on the economists’ GDP meters, but completely phony and not at all what people really want.
And what happens to people’s savings? The Governments – through their Central Bankers – and their favoured groups eat up your savings. This whole Keynesian stimulus project is a scam from beginning to end.
The book ‘The Road to Serfdom’ written by Friederich Hayek in 1939 and reprinted recently, is a real eye-opener because it is again very applicable, or actually even more valid today.
Advantages of an Economic Depression
The failure to agree on orderly debt reductions led in 1931 to disorderly defaults, tariff wars and further worldwide collapses of production and employment, during the last Great Depression. An article written by Bill Bonner on economic depressions, explains in detail the pros and cons of depressions, 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, but it is a recipe for 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 businessmen to redirect their efforts to 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 a 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 labour falls and rises too in sync with the market. You may not be willing or able to hire extra workers at $10 an hour, but how about at $5?
Trouble is, the Central Banks interfere with these self-healing trends. Minimum wage laws prevent employers from taking advantage of low-quality labour at low prices. Unemployment compensation keeps workers from discounting their own labour. Zero interest rates and bailouts keep the zombies on their feet.
Even in the best of circumstances – that is, in a free market – labour rates tend to be “sticky.” They don’t adjust quickly. With the CBs applying so much glue, it’s amazing that they can move at all. But eventually, a depression brings its magic. Prices fall. Investors are wiped out. Businesses go bust. The ‘destruction’ of the capital stock frees up both money and labour for new applications. The ‘creative’ part can begin; the build up. – Unfortunately The Central Bankers have thrown a spanner in the works. They 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 10 people unemployed, competing for every job. A normal recovery would see in a sound economy the addition of up to about 500,000 new jobs a month. Instead, monthly additions are a quarter of this, or less, and economists hail this as a major victory. Of course, we need to create 150,000 jobs just to stay even with today’s population growth. But there are 10 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?
The truth is, no one really fully 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.
Central Bankers 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 really improve the job picture.
The education industry has been a money pit. Huge amounts of money have been “invested” both by parents and governments. It doesn’t seem to have helped the economy very much. True, a college grad is more likely to find a job, but only because he’s taking it away from someone without a diploma or degree.
The unemployment problem is a “tough nut to crack,” says The Financial Times. – Of course, the jobless problem could be fixed overnight. But people wouldn’t appreciate it. Simply remove all subsidies for unemployed people, and all restraints on hiring. Labour prices would fall fast. Within days, there would be full employment again.
In fact, the whole financial crisis would have been solved by now with less pain, if the Fed under Mr. Greenspan during the recession of 2001/2 wouldn’t have 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 it 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 the risk will be recognised as being too high to continue lending. This is the reason why sovereign debt has reached unsustainable levels within the PIIGS-countries; Portugal, Ireland, Italy, Greece, and Spain.
Direct and indirect bailouts have made the debt bubble bigger, bringing forth the strong probability that these unsustainable levels of borrowing will eventually 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?
Disappearing Credit volume:
All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Data from the U.S. Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December 2016.
The sector has weakened acutely as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4% on annual basis, a pace of decline not seen since December 2008.
If new loans aren’t granted, the supply of credit money will contract. That’s the “doomsday catch” embedded in today’s credit money system: It is subject to sharp and disastrous drawdowns in the money supply. When loans are paid off or written off, the outstanding ‘credit money’ – ceases to exist. This reduces the money supply and triggers corrections, recessions, or market crashes that will ultimately end in a severe depression.
Real – gold backed – money doesn’t disappear in a credit contraction. But fake “credit money” does. This makes the entire money system vulnerable to the credit cycle in which Credit first increases, and ultimately decreases.
And as credit money vanishes, the recession deepens, causing the credit market to tighten further, and subsequently causing more money to disappear. That’s why a credit contraction is so dangerous in today’s ‘credit money’ world. With more than $200 trillion in outstanding debt globally, even a slight contraction could lead to a worldwide depression.
Recapitulating, an economic depression is a good thing. It eliminates 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 this ‘destruction’ that Schumpeter called; ‘creative destruction’ that is essential.
The more you think about it, the more you appreciate the looming depression. After rip-off bailouts and bogus recoveries, a depression, it would seem, is something to look forward to.
The Ambitious Goal Is War:
If the Federal Reserve and Central Banks allowed the markets to do it’s one and only job, to determine fair value, the economy would be out of the woods by now. The world wouldn’t be facing another war right now. However, they refuse to do this. The free market has been stolen. We really could be on the edge of a major event. There could be huge amounts of cash coming out of the stock market because of all this fear. There could be massive amounts of cash going into suppressed assets like gold and silver. Housing could come under pressure. “We could be staring at the next real Great Depression.” Says Gregory Mannarino.