02/23/10 Baltimore, Maryland – “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
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I just read that state tax revenue last quarter dropped for the 5th quarter in a row. How is that possible if the economy is growing?
I also read that the number of unemployed went up in every state last quarter. How can that be? I thought employment had bottomed a few months back.
Things just don’t add up.
Pay no attention to the fact that the Fed says hiring will never recover the jobs lost.
Pay no attention tot he 27% jump in problem banks-even with the phony hot money from the Fed.
Pay no attention that the IRS kamikaze’s manifesto against bailouts and middle-class taxes enjoys broad support on the right AND left.
Pay no attention to the violence against Wall St. firms HQ’s in Greece (soon to come to these shores BTW).
Just keep partying!! AAPL!!! AAPL!!!
I’m Harry!
Employment will never recover: FED
Housing collapsed in December and would take gains of 2% per month the entire year of 2010 to get back to 2008 levels.
Ditto the DJIA.
Some recovery.
O, buy AAPL and all will be ok…..
Invest in Halcyon’s manufacturer as well, cuz it’s extremely popular on Wall Street and in Washington.
How about sending some of America’s unemployed to eastern China to fill apparent job vacancies in the factories that make crappy toys for sale in the U.S.?
Also, how about sending some U.S. Congressmen (women) to China to toil in those same factories as their beer-drinking constituents? A good resume gold star for the next election cycle!
What jobs would the “exchanged” Chinese do? Work in U.S. government (!), digging post-holes then filling them in and repaving highway after highway, over and over again!!
So, what would the net effect be? No clue, but it would be a diversion and some money would be sent home from China to pay for underwater mortgages, credit card debts and taxes. The Chinese would send their money back to be banked.
Meanwhile things are looking down all over; what with Europe on the verge of continent-wide civil strife, Japan’s deflation and China’s bubble-in-the-making.
Oh, joy.
Keep on keeping on, Bill.
“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.”
the blessed spirit of murray rothbard is with us yet….
I have no problem with the government sending checks out to people. Better that than have desperate people around looking to crack you upside the head for a loaf of bread.
Even if I do accept the idea that desperate workers make better workers, which is probably a fallacy.
Harry is probably giddy, the great Bill Bonner must of noticed his ranting on here. How bout that consumer confidence, after all consumer spending only makes up 80 % of the economy . Looks like a recovery in fantasy land.
Your definition:
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.
I’ll agree with that and we have seen the adjustments and we are seeing the new growth begin. I don’t care what you call it, it ended last April/May. That’s pretty clear.
Consumer Confidence is a really stupid poll based basically on what the stock market did, and it was down, when people are polled. Useless. Always has been.
Now look at other data like Redbook and ICSC Index. Both are showing stronger consumer demand.
Also, Case/Shiller is showing a stabilization in housing that is being confirmed each month. Tomorrow, we’ll get a look at how New Home Sales have definitely stabilized confirming that trend as well.
Each day over the past two weeks, I have listed very strong economic data daily. Your recession/depression is in the history books now and we’ve moved forward (Well most of us outside of this board).
Listen closely to Chairman Bernanke tomorrow. No one here can deny that he’s done a masterful job in turning this around without whatever consequences China may suffer from too much stimulus. He deserves to be applauded by every citizen of this country.
It doesn’t really matter how fast an economy is growing. It doesn’t even matter how fast it is growing per person. What counts is how fast it is cosuming non-renewable resources per person…and whether that ‘growth’ is (sustanable)real or (not)phony.
If China blows up, there’s a good chance that a country with a huge military and a huge imbalance between men and women could begin a war. Maybe we should all invest in munitions.
Gee Harry, did you see that ultra huge Equipment Auction taking place in Florida? Who is going to purchase all of this equipment at good prices? Equipment is a glut on the market now, why? Because it cannot be put to productive use, that’s why. This stuff will sell because it will go very cheap but it will not produce any more new good jobs. Matter of a fact it will kill many manufacturing jobs in the USA because most of this equipment is American made. So who will buy brand new when slightly used goes for half price? This is not the only venue for this type of equipment, there are many more auctions every day on the internet, all going at lower than normal prices. I don’t see a resurgence in construction any time soon. Regards, CanadaNorth
Rich, don’t forget that lead is a precious metal too.
That must be why it FEELS like we’re in a depression: million of dollars are being spent, and employees are being hired, but that is mostly being done by the government, and for purposes that are short term (fixing a road) or not wanted by any private individuals. So, we’re unemployed and broke, but there is plenty of money for extended unemployment benefits, boondoggle “reinvestment act” projects, etc. Doesn’t feel like a recovery.
“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.”
BRILLIANT !