Friday, January 30, 2009
Recessions Depressions and this mess.
| Recessions, depressions and this mess It has been my observation that when you have an opinion that is at odds with most of the world, you are usually wrong. This time I am pretty sure I'm correct and most of the experts, at least in Washington D.C. have it wrong. Recessions are usually caused by inventory adjustments. Factories over produce creating a supply glut at a given price, and most lay off workers until inventory shrinks, or lower the price to move the products. With the explosion of information over the last three or four decades these inventory adjustments have become much more mild, and in some businesses nearly non-existent. Recessions are generally over in a nine months or so, but can extend for a year or two. Depressions start out as recessions and get worse. The tipping point is historically when unemployment reaches 25%, but a recession lasting two or three years with unemployment at 15% or more would these days be considered catastrophic, and by most observers, a depression. Often a panic of some sort is the turning point, and systemic problems cause the economy to unravel. So what is this current economic mess, and what caused the collapse? The conventional wisdom is that congress pressured banks to make risky loans to individuals purchasing houses. This created an over supply of houses at current price levels. If this were true, then we should be in the midst of a mild correction, and home owners would be forced to stay in their homes until such time as prices stabilized. We would see a contraction in GDP, largely due to a loss of construction jobs, and the corresponding slow down that these workers would effect by not purchasing computers, cars, appliances and other goods and services. This is largely what Republicans and Democrats believe is the problem. Democrats tend to view all economic downturns as driven by a lack of money in the system. So we get stimulus packages and bail outs. Republicans believe that the fix is to allow the markets to find level ground, and that injecting cash in to the economy will cause more harm in the long run by creating inflation. BE WARNED: THIS MESS IS SOMETHING ENTIRELY DIFFERENT. Just as the housing crisis was starting to unfold, the price of oil was going up. This put a further pinch on those homeowners who were just scraping by. Just prior to the economic troubles, congress was unable to find a way to stop an influx of illegal migrant workers, putting downward pressure on jobs. It gets worse. Just at the time when the world needs to look to the United States for a stable currency, congress and the new president are injecting trillions of dollars in to our economy, which will drastically devalue the dollar. Just at the time when the automakers need increases in efficiencies, and incentives to lower costs, congress is pushing for new mandates that will cost automakers billions of dollars. I could go on for quite some time, but the facts are fairly obvious. At every turn, our political leaders are making the wrong decisions. This is not out of any kind of malice, but more a result of a failure to understand a systemic failure. Why is this happening? If we look at the very way congress is constructed and operates, and that our political leaders are elected, a clear picture starts to emerge. Most politicians are career politicians. They are not experts at viewing large scale systemic failures. As soon as a member is elected to congress, he is put on a few committees and is expected to master a specific issue. This leads people to look for the problem at a core level where they may have a certain level of expertise. This is the exact same reason many large businesses fail. Their CEOs look for a core problem. But in systemic failure, the problem may be caused by the interaction of several seemingly unrelated events. This does not necessarily mean that the problem is complex, it simply dictates that several smaller issues are conspiring to create a major problem. Unchecked, this problem will spread throughout the system and cause a catastrophic failure from which recover is either impossible, or unlikely without a complete change in the system. This is exactly where we are today. If President Obama and congress do not address the systemic issues there is no hope for a recovery over the long haul. An 819 billion dollar party will of course lead to good times for a few selected groups or individuals, but it cannot and will not fix the problem. When the cash drug wears off in a few months, we'll be in much worse shape. Prices will go up, unemployment will rise, and even hard assets will become less valuable in real money. When this virus affects the entire world, wars and violent civil unrest are sure to follow. So how do we fix it? The first step is to stabilize the system. We will still have failures, but we can mitigate their effects by addressing the few underlying issues and strengthening the foundation. The foundation of an economy is the value of the currency. This is wonderful news for those who peddle in reason and logic, but horrible news for the politicians who peddle in shiny happy people. The way to strengthen the currency is to stop printing money and expanding credit. Businesses and banks will fail as a result. But when the currency is strong, and the borders are secure from foreign armies, nations ultimately prosper. Over five thousand years, this is the one constant. The second step is to address supply and productivity. But how do we do this when there are literally millions of products and hundreds of millions of consumers who want and need an undefined cornucopia of these products? We need to find a core ingredient. Thankfully, we have a core ingredient that affects the cost and price of every product and service made; oil. This is only the first step, and I'm sure my friends on the left will be miffed at my simplicity, but the fact remains, lower oil prices lower the cost of everything. The third leg of this recovery tripod is government spending. When the government steps in to borrow money, it competes with businesses and individuals. Stimulus packages also direct money and resources by government mandate, as opposed to the free market. The free market is not some evil corporation, it is you. The individual decisions you make. You let the businesses know clearly which products and services you desire. When the money is directed towards these products and services, profits arise. When come profits, come competition as others enter the fray to try and deliver the good or service at a lower cost to you. When the system foundation of the economy has been addressed, the economy will stabilize and in fact start to grow again. Then and only then can we start to look at micro-managing certain aspects of the economy, at which time our politicians will surely mess it up again. For now we must be clear on things. This is not as the Republicans seem to claim a normal recession caused by over supply. It is neither as the Democrats assert a problem of not enough cash in the system. If I were president, I would veto every bit of legislation that does not strengthen the currency, or increase the foundation of supply. As I am not the president, I would suggest you take up religion. You may find some solace in the bible, you will surely not find it in the economy for the next few years. |
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