Let the Depression Burn Itself Out

The year is winding down. The sun is low in the sky. There soon won’t be anything left of 2011.

The Dow put in a good performance yesterday — up more than 300 points when we last looked. Housing starts were at a 19-month high…which caused investors to think recovery is right around the corner.

Christmas is coming too.

But at least we know what we want for Christmas — a depression…a merry little depression.

Paul Krugman says we already have one:

“It’s time to start calling the current situation what it is: a depression.”

We should be so lucky!

The nice thing about a depression is that it cures a depression. Stocks collapse. Businesses go broke. Speculators jump from tall buildings. Wages fall. Prices drop. Interest rates sink. And then, with the cost of assets, labor and credit at rock-bottom levels, the scrap dealers, recyclers and entrepreneurs get to work. They pick up the pieces, dust them off, and find ways to make them productive again.

Some years ago, forestry experts realized that trying to prevent or put out forest fires was not always a good thing. Forest fires are natural events. Lightning hit dry tinder. It burnt off the underbrush, laying down valuable ash. The forest was cleared…and fertilized…and ready for new growth.

Today, most foresters believe it is better to protect lives and property, but otherwise let forest fires burn themselves out.

Like forest fires, depressions seem to be natural occurrences. Few people like to see them coming. They call the feds. Within minutes the smoke jumpers are out of their planes…and the feds are on the scene with their water cannons and water bombs.

As we saw a few days ago, the feds put $29 trillion to work fighting the Great Correction. If money were water, they flooded the world with a Lake Erie of liquidity. And what did they get for it? One very soggy economy.

The Crash of ’21 was followed by the Depression of ’20-’21. In terms of lost GDP, it was about the same as the decline of 2008-2009. But in terms of prices it was much worse. Prices fell as much as 18% in a single year. Unemployment approximately doubled. The stock market collapsed 50% and industrial production fell 30%.

Instead of throwing cold water on the depression fire, the government actually poured oil on it. It did exactly the opposite of what our government does today. It did not respond with a program of counter-cyclical spending. It cut spending. According to the Keynesian geniuses of our time — including the aforementioned Nobel Prize winner, Krugman — they made the situation worse.

But it worked! The Great Correction has been smoldering for 5 years. It will probably go on for at least another 5 years…maybe 10 or 15. But the depression that began in January 1920 was over by July of 1921 — just 18 months later. Soon, the economy was booming again.

Why? A depression cleans up mistakes. It burns off bad debt. It lays down a thick blanket of mineral-rich cinders, providing the perfect bed for planting new businesses and hiring new workers.

Oh Santa…give us a real depression in 2012!

Bill Bonner
for The Daily Reckoning

The Daily Reckoning