05/01/09 London, England Not infrequently, governments ‘shoot themselves in the foot.’ But in the current event, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off.
Readers are reminded of our Daily Reckoning Law: ‘The force of a correction is equal and opposite to the deception that preceded it.’ Today, we offer a corollary: ‘The greatness of a depression is commensurate to the government’s efforts to prevent it.’
Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head:
“The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable,” explains Germany’s chancellor. She went on to suggest that maybe we shouldn’t repeat the errors of the past.
As a proxy for ‘deception’ in our handy dictum, substitute ‘money.’ And now consider it in its two misleading forms – credit and deficit spending. “Credit not backed by real savings is a fraud,” the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.
During the entire last half a century leading Western economists imagined a world that couldn’t exist for one minute – where consuming wealth makes people wealthier…and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn’t need with more money they didn’t have. This produced ‘growth.’ But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.
In the first four U.S. recessions after the Great Depression, from the mid-’30s through the mid-’50s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds – witless, as usual – often increased them or left them alone. But deficit spending went up an average of 2.2% of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.
As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new ‘growth’ the feds were after, but all the accumulated debt and mistakes from previous stimulus programs.
In the recession of 1973, Brookings Institution economist George Perry told Congress that “we should be pulling out all the stops” to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4% of GDP, according to an estimate by Jim Grant. Future generations of Fed governors and Treasury secretaries found more stops…and of course, pulled them out too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2% of GDP, according to Grant.
The deceptions of the Bubble Epoque, 2001-2007, were enormous. The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion – at least, here at The Daily Reckoning. The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France’s deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States of America. This response is 3 times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.
It is, we will guess, what makes a great depression even greater.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
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Nice article but stop saying ‘England’ when referring to ‘Britain’.
Thanks – toodle pip!
‘The greatness of a depression is commensurate to the government’s efforts to prevent it.’
Your evidence?
“Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.”
Yes, yes, yes it does have to be borrowed and then repaid, but by borrowing it and spending it now they can prevent a loss of confidence and unnecessary decline in economic activity. Then when the economy is booming and they have more revenue they can pay it back.
“And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion – at least, here at The Daily Reckoning.”
Yes, at the Daily Reckoning its a foregone conclusion. But it probably won’t happen that way. The recession will run its course and 6 months to a year the economy will be expanding again at a 3 to 4% pace and you’ll be predicting doom for another 10 or 15 years until there is another recession at which point you’ll be writing about how its going to get so much worse and the end is near and then that recession will end after a year or so, with help from the govt, which you will continue to claim will lead to the eventual ruin of mankind.
Hey Blah,
Nice Keynesian try! The last time I checked the government was responsible for prolonging the first Great Depression. Come on, it’s not all roses out there. The last thing this economy needs is more government spending to saddle on the backs of everyone. What makes you think that when the economy is booming the government will pay back what they borrowed? Have they done this on a consistent basis in history? What this economy does need is for companies that need to go bankrupt, go bankrupt, for people to start saving more and for this country to be a net producer of goods instead of a debtor nation.
Good luck with your rosy point of view!
Blah is aptly named. Somehow the cheerleaders for nanny government always find their way to Economics internet boards. Coincidence?
Blah Blah Blah
The problem we currently face is due to excess borrowing and spending by the UK government and public, the UK is heading towards oblivion with a 12% and rising GDP defecit, this is not a responsible way to deal with a ressesion / depression, I must admit I admire the Irish responce, they have made a comitment to return to fiscal responsibility and have made serious cuts to public expenditure to achive that, the UK and most other countries running huge defecits will have to reverse these sooner rather than later, to try and spend your way out of ressesion is like having your head in the sand, goverments with ideas like your own may think they are correct but im certain history will not show them in good light.
“consuming wealth makes people wealthier” can’t exist for long .. no, not for everyone but for those selling goods at the higher reaches of the pryamid … well it makes some very wealthy. I guess simple greed is too simple an answer — lets say self interest and a lovely sales pitch to the suckers..
If you have lost wealth in the last 2 years — you were suckered and yes fruad should be punished but its now “too big to fail and too many to jail” that keeps the same fruadsters at the top. consider that the major banks (for one) have just completed a bloodless coup over the political USA. Who are they? the ones left standing and distributing the bailouts….
Humbug to all of you.
National debt (of any form from a dollarette bill to a T-bill to a T-bond) will be paid back – eventually – by the universal tax of inflation and destruction of the very money the Fed’s peddle.
That’s what the poor general public never realizes until the currency is destroyed and we live in our own Zimbawbe (or Berlin in 1923, or any other place that prints fiat money with insufficient production to honestly tax to pay for it).
It’s just that inflation starts ever so tippy toes quietly and slowly that no one really cares if bread cost a few cents more today than 6 months ago —- until bread costs more today than it did yesterday and costs more tomorrow than it did today!
Then the excrement hits the fan and the gold/silver bugs finally get to scream (like Mogambo!) “We were right all along! We’re doomed!”
Between federal stupidity and melting ice bergs, hell, maybe we are doomed…
I am in no way going to defend government policy of running huge deficits and mortgaging the future of generations to come. But what kind of morons hands out loans to the tune of billions if not trillions of dollars, to people who have little if not any, ability to pay the loans back. Corporations lobbied hard for deregulation, they got what they wished for. If the previous reader thinks this is just your garden variety recession that will soon blow over, then I am sure that he can find some toxic debt, that the banks would love to sell him.
blah writes: “The recession will run its course and 6 months to a year the economy will be expanding again at a 3 to 4% pace and you’ll be predicting doom for another 10 or 15 years…”
This should be kept in a hermetically sealed mayonnaise jar, protected by armed Pinkerton’s in a wall safe bounded by at least six inches of titanium. The combination and key should be kept by a well regarded (find one of those) CPA firm. said safe to be opened in the presence of witnesses selected at random from a telephone directory of your choice (preferably a small town in Iowa).
Then play them back. Let’s see what we shall see.
Bill from what I can tell govts are as bogus as their currency and the idea that they ever PAY anything back to anyone is a delusion. All the govts that are inflating their currencies will simply do what Mr Gono is doing … knock a few zero’s off the currencies and thus simply pretend their money is now worth more against the imaginary TWI or basket of currencies. What joke when in real terms we all know that central banks already transact most of their exchanges in precious metals or other equivalent goods eg Aussie buying Yank jets for exchange rate transactions eg NO dollars actually changed hands simple negative entries on the govts consolidated revenue line offset by treasury manipulations. Yes all learned from over 30years working for treasury.
Their is no justice or fairness either in general or particularly in financial life.
So goes the world down its perpetual growth path driven by idiots who never had any interest in anything but their own greed and power.
so what is the real solution please?
Welcome to Bunkologic and that gleaming Casino City State on the Potomac , Washington D.C.. It has recently announced the largest Federal construction project since the Pentagon in the form of a renovation of a …I kid you not… Mental Hospital, for the Dept. of Homeland Security. Anyone who continues to claim this government will do much of anything fruitfully, should simply punch themselves in the nose twice, real hard so as to soften the reckoning to come when the Federal Cosa Nostra is revealed for what it is……a not-so-organized Criminal syndicate with a bullhorn instead of Omerta.
Melting ice caps!! I believe the latest testing completed just about two weeks ago show a mistake was made and the ice is considerably thicker that first thought; somewhat like the heads of those in charge who tell us they really do have THE ANSWER. That being true, I have some wonderful ocean front property just out of Vegas that they would love.
Bill easy to say but how can one convert $1.6 mill into gold or silver eg what and where are their any safe investment given the market manipulators are everywhere so who do you trust? please some real advice about where to stash your cash?