In Defense of Economic Depression
Warning: serious thinking here…
Big rally yesterday. The Dow was up 274 points. Gold went up very slightly and still closed below $1,200.
What gives? A big change in direction? It’s probably nothing. Markets don’t go up or down all in one straight move. They play with investors like a cat with a mouse. They tempt him into bear markets and scare him away when prices are rising. They shake his courage at bottoms and addle his brains at tops.
An investor never knows for sure what the market is up to. And he’s better off not worrying about it. He should look for acceptable value and nothing more. If he finds a company he likes…if he understands the business model…if he has studied the company’s financial picture and satisfied himself that management knows what it is doing…and he can buy it at a price that gives him a fair return on his money…then, he can buy the stock. And then he shouldn’t worry if the price goes up or down.
Trying to make money by guessing the stock market’s direction, on the other hand, is likely to be a losing proposition. It only works, marginally, at the extremes. And we’re not at an extreme now. But if we had to guess, we’d say the market is headed down. But we’d rather wait and see what the market has to say for itself.
In the meantime, let’s turn to the economy where we can have more fun. In the markets, the bulls could be right. Or the bears could be right. Who knows?
But the economy seems easier to understand and predict. And economists? That is where our doubts disappear. We know most of them are wrong most of the time.
Paul Krugman rants and raves. He thinks governments are making a big mistake. They should forget about saving money and cutting deficits, he says. They can worry about that later. What they need to worry about now is a depression. Unless the feds get on the ball and spend money, we could sink into another Great Depression, he warns.
Martin Wolf at The Financial Times in London makes the same point. He mentioned ‘depression’ yesterday. The private sector is saving; without a lot of ‘demand’ courtesy of the state, he says, we run the risk of depression.
The two of them are so sure a depression would be a bad thing, it makes us wonder. Maybe a depression wouldn’t be so bad, after all.
The gist of the argument against depression is that people lose their jobs, incomes go down, companies go bankrupt and so forth. Is that all? Well, in general, people have less stuff…and less money to buy more stuff.
If that were all there was to it, it would seem like a small price to pay for the benefits of a depression. After all, a depression would wring the debt out of the economy. It would get rid of weak businesses. It would turn spendthrift households into savers. That’s got to be worth something.
The large presumption behind these worries is that, in a depression, people do not get what they want…they are disappointed. They are poor. They wear shoes with holes in them and drive old cars. They vote for Democrats and start reading Das Kapital.
What actually causes a depression, anyway? People choose to save rather than spend. Reduced demand causes a drop in sales…an increase in unemployment…falling prices and all the other nasty things we associate with a ‘depression.’ And yet, behind it is something people really want – savings. And behind the desire for savings are very real calculations and 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 come their way.
In other words, there is a depression because people would rather have savings than a new car, or a new pair of shoes, or a vacation. In other words, people choose to have their cake 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 do something about. The economists’ answer to this is to let the people have their savings…but to counteract the economic affect of higher savings rates with increased government spending.
It sounds so neat…so clean…so symmetrical. You might almost think it made sense, if you don’t think about it too much.
But wait. Where do the feds get any money to spend? They have to take up the savings. They take the cake! And there you have the problem right there. Resources have to come out of some other use – say, inventories, investments, whatever – and be put to use on government projects. We can safely assume that the federal projects are not the angel food, layered and frosted confections that the savers wanted to eat. Otherwise, they would have willingly paid for them themselves and there wouldn’t be a downturn in the first place. So, instead of savings and depression, the people get boondoggles and “growth.” Only it isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is empty calories…measurable as “growth” on the economists’ GDP meters…but completely phony and not at all what people really wanted.
And what happened to their savings? They’ve been eaten up by the feds and their favored groups.
This whole Keynesian stimulus project is scammy from beginning to end. And in the middle too.