The Recovery Road Less Traveled

With his toes in the sand and the cool waters of the Atlantic Ocean lapping gently at his feet, your editor can fairly say we have reached the end of our little Daily Reckoning Coast-to-Coast Correction Tour. So where to now for your Ho-Jo-hopping correspondent? Ahh, more on that below. First, some more important considerations…

When we began our journey, one month, a dozen states and a few thousand miles ago, we had in mind one primary objective: to get a first-hand look at what was really going on in the world’s largest economy. How are honest, hard-working folk coping with the slow, state-sponsored collapse of their empire?

What, in other words, does a Great Correction look like, up close and personal?

Recall that when we started our trip, it was not yet known that home sales across the United States had fallen to a record low, as they did in July after the expiration of the Fed’s $8,000 homebuyer’s bribe…ahem, tax credit. Equity markets were still to suffer their worst August in almost a decade. The FDIC had not yet added 53 more banks to its “problem list,” bringing the total number to 859 distressed institutions, the highest number since 1993. And, according to Friday’s jobs report from the BLS (which, signaling that things are “not recovering at a slower pace,” was actually seen as a positive sign by the markets) a full 54,000 more people were drawing regular paychecks. Unemployment rose to 9.6% on Friday.

Economics, as we never tire of reminding our Fellow Reckoners, is an imperfect science, more liquid than solid, more gaseous than liquid. Federal stooges may rope statistics to the rack, stretching and contorting them until their joints pop and they agree to comply with whatever theory suits the day, but reality becomes ever more difficult to distort as the situation grows increasingly dire for millions of Americans every day. It’s why so many people scratch their heads when the news comes on every night. There’s a clear disconnect between what they see on the television and what they experience in their own lives. The evening news has, in effect, become the new “non-reality television.”

One of the many benefits of being “on the road” is that one has little time to pay attention to the regular news. We are reminded once again of the inimitable Mark Twain’s words: “If you don’t read the newspaper, you’re uninformed. If you read the newspaper, you’re misinformed.”

Talking heads and TV neckties cast aside, your editor employed a fittingly non-scientific method by which to discern the health – or non-health – of the economy: we talked to people.

We’d like to think that the average Joe (and Josephine) is a whole lot smarter than his government gives him credit for. Even if he can’t connect the dots…even if they don’t speak in econo-lingua, he sure knows something “just ain’t right.”

“I’m a small business owner,” an Alabama B&B owner-operator told us, “so I’m really struggling here. I voted for this administration…but now I’m not so sure. We had a plan, my husband and I. And now, with our healthcare costs rising, with the state of the economy such as it is and with the government handing all our money to their pals on Wall Street…well, we’ve had to really reassess the feasibility of those goals.”

In an issue titled The War on Small Business, our mates over at The 5-Minute Forecast published some interesting figures earlier in the week, hoping to shed some light on just how vital small businesses are to the wider economy.

“To help set the stage,” wrote The 5, “let’s look at some important stats from the Small Business Administration (SBA). Small businesses:

  • Represent 99.7% of all employer[s]
  • Employ just over half of all private-sector employees
  • Pay 44% of total U.S. private payroll
  • Have generated 64% of net new jobs over the past 15 years
  • Create more than half of the nonfarm private gross domestic product (GDP)
  • Hire 40% of high-tech workers (such as scientists, engineers and computer programmers)
  • Are 52% home-based and 2% franchises
  • Made up 97.3% of all identified exporters and produced 30.2% of the known export value in FY 2007.
  • Small firms produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large-firm patents to be among the 1% most cited.”

Of course, it’s not only small businesses that are under assault. Workers around the country hum a similar sad tune…

From an auto-repairman in Tuscaloosa, Alabama… “People ain’t buying new cars anymore, not since that Cash for Clunkers program finished. Now they’re just trying to keep what they got going as long as they can…This place got hit pretty hard, all in. The Mercedes plant, just in town, shut down half their operations, laid of some twelve hundred workers or so. In a place like this, that’s a heckuva lotta people…”

From a board member of a Houston-based energy company… “A few months ago, it would have been difficult to imagine a bigger disaster than the oil leak itself…then the federal government got involved. It’s likely that the actions they’ve taken will have a more lasting, more devastating effect than the spill ever could have had on its own…”

From a restaurant owner in Savannah, Georgia… “People just aren’t coming in the way they used to, not these past couple of years, anyway. Things are bad. Folks are worried.”

From a bartender in Delray Beach, Florida… “Over the last year, well, it’s just slow…and getting steadily slower.”

Across the nation, Big Government is doing all it can to prevent any real, honest progress from taking hold. What the central planners can’t seem to grasp is that, in the same way a teenager must suffer and, in turn, learn from his own mistakes, sometimes an economy must take a few steps backward before it can stride forward again with the renewed confidence and wisdom only experience can bring. The Fed’s “protect growth at all costs” policy either misses or ignores this point entirely. Either way, the result is the same. Mistakes are not corrected. Incompetence is rewarded with bailouts, not punished by bankruptcies. Bad debts are piled up, not paid down. Instead, they are left to form the bedrock of future building site collapses.

“We don’t know how many mistakes there were,” Bill Bonner, our Reckoner-in-Chief admitted this week. “We don’t know how far GDP SHOULD go down. And we don’t know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age-old ways – by panic, default, bankruptcy, restructuring, and reconstruction.

“We don’t know,” continued Bill. “We’ll never know. But there is no reason to think we’d be any worse off if we’d found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.”

Joseph Schumpeter coined the phrase “creative destruction” to describe the selective, evolutionary process of a naturally correcting marketplace. The weak must be allowed to fail if there is going to be room for the strong to succeed. The powers that be obviously misunderstood the concept, choosing instead to simply destroy the opportunity for creation.

As far as the Coast to Coast Correction goes, real recovery begins only where Recovery Act signs stop.

Joel Bowman
for The Daily Reckoning