“How bad is it going to get?
Yesterday, a reader wrote me and asked:
“I have been wondering how bad the current economic “crisis” will get. Depending on who I talk to I have been told everything from “this is simply part of the normal cycle of economics” to being told to invest heavily in ammo”
Ok, here’s my take on it.
Short term? Not too bad. Unemployment and the credit crunch are going to creep up a bit more; but for the most part the recovery has actually already started.
Though, if the government (Democrat and Republican) continue their spending spree, they could double hump this recession…. actually, I think there’s a very good chance of it at this point.
The “stimulus” and “bailout” won’t be doing any real stimulating (except maybe in the auto industry); and could very well end up pushing us into the doublehump recession by preventing the efficient allocation and reallocation of capital and labor resources.
I have said from the beginning, this was a manufactured crisis. The banking shock and housing crash would have been serious, but relatively minor bumps; if they weren’t blown up all out of proportion by the media and government.
Through this deliberate manipulation (and yes, it was deliberate), the sectoral recession became a self fulfilling prophecy of general recession.
This was done intentionally, to create political opportunity for a plain and naked power grab (Rahm Emmanuel publicly admitted that much); and an explosion of graft, “legitimate” bribery, and vote buying not seen since Tammany.
In the long term, there could be some serious repercussions to our economy as a whole. Partly, it depends on how successful the democrats are at pushing us into socialism; or at the least, their manipulation of markets, and incentive structure.
Mostly however, it really depends on what the Chinese do.
Yes, we’re going to see an inflation hit from all this (should be a big one actually, though not 1979 big); but our RELATIVE inflation is actually far less than most other currencies around the world (and considerably less than the euro). Because of this, even with our mess right now, we’re actually gaining in value against most major currencies (excepting of course the Yuan).
The Chinese are holding the line on relative currency valuation by buying up as much of our debt as possible, because their trade and current accounts depend on the value of the dollar; but they can’t do it forever, or THEIR economy will tank from the other side of things (especially if we keep inflating, and accumulating debt; which is the current Democratic “plan”).
A debt sell off (unlikely, because it would destroy their economy as well), or a recession in China (much more likely) would stop them, and us, flat; and then the entire world will go into a true depression.
We need to avoid that at all costs; but it’s not something we have much control over; and the current government in this country seem hell bent on pushing us over that cliffs edge.
What needs to happen here to allow us to rebalance and make a true long term recovery, is a massive deleveraging, and moderate deflation for a year or two.
If we allowed that to happen naturally (and it’s too late to do so really, given the stimulus and bailout, but we could still salvage something); it would mean perhaps two years of negative growth, and a spike in unemployment, with a lot of bankruptcies, mergers, consolidations and writedowns. However, it would be followed by a period of rapid growth and expansion as capital gets more efficiently reallocated.
It’s called the business cycle, and it works, and it’s historically proven.
Unfortunately the government is actively and aggressively preventing that natural rebalancing from happening. We should be trying for a short sharp shock, and instead they are trying to move us into the European/Japanese style social protectionist stagnation.
If China holds strong, we will slowly recover, and Europe will slowly sink. If China falters, everything goes into freefall for a while, but we come out on top because of our structural strengths (again, presuming the government doesn’t try to destroy those strengths through more socialism and market distortion).
…That may take 20 years though; and what happened in the mean time would be unpleasant.
Oh and that’s not even taking into account the coming “retirement bomb” for Social Security and Medicare… that one makes this one look like a minor hiccup.