Recession or Depression?

Our economy has really been on the decline for sometime now. The first obvious sign was when we reneged on our obligation to back our dollars with gold in response to foreign creditors seeking payment in gold as the value of the greenback was declining and our economy weakening. That was back in the early seventies during the Nixon administration. Since then the nation has been on a ‘fiat” system where the ability to print money and create electronic credit money through banks has masked the decline of America.

It should first be understood how America rose to economic preeminence in the world. Others misfortunes became America’s fortunes and that’s how America became an economic superpower. In particular, World War I and later WWII so decimated the infrastructure and economies of Western Europe, the primary economic powers of the world at that time, that it created a void filled by America. The US participated in these wars but the US homeland was never a theater of war, aside from Pearl Harbor. So after the wars the US economy was the only economy left standing and consequently our goods, services and finances were in demand the world over. The key phenomenon to note is that we had a monopoly.

Anyone who understands the nature of monopolies understands that the construct is very enriching for those who operate them. The absence of competition allows for a great accumulation of wealth. America’s monopoly created the highest standard of living the world has ever seen. However, our monopoly was unsustainable as the inevitable rise of the former economic powers that were decimated by wars was only a matter of time. The recovery of those economies presented the first impetus for our decline by turning our virtual global monopoly into a more competitive oligopoly. Prior to this period, our nation ran tremendous trade surpluses and was the largest creditor nation in the world as many nations were indebt to us.

Fast forward to today and a world that has been at peace for over 50 years, aside from a few skirmishes with small nations, the oligopoly is being dismantled. The addition of China and India into global capitalism has added over 2 billion potential new workers, consumers and owners to the game. Hence, the high standard of living that resulted from monopoly and to a lesser degree under the oligopoly, is now severely being eroded by a truly competitive world were once marginalized undeveloped nations are now becoming major competition. The current resultant and or evidence of our decline manifest from the fact that our nation has been running large trade deficits for the last 25 years and we are now the largest debtor nation in the world owing several trillions of dollars.

Credit or borrowing from future earnings is what has allowed Americans to maintain their standard of living. Oh, and lets not forget that back in 1950, during our zenith, a single income earning male could and did provide a solid middle class living for a nuclear family composed of spouse and children. Today, it takes two incomes in the same household to achieve the same standard. Consequently, we have sacrificed child rearing to maintain our materialism and material standard of living, as well as, borrowing from our future earnings. Were do we go from here? This model is totally unsustainable unless we put children in the household to work next and or become virtual indentured servants to lending institutions who extend our credit to promote our profligate consumption even more.

American consumption is hyper inflated via credit. Our consumption needs to contract by about 1/3 so that our purchasing falls in line with our real earnings. However, given that our Gross Domestic Product (GDP) is derived mainly (2/3) from domestic consumer consumption, a 1/3 contraction of consumption would create a severe depression. Politicians do not want recessions during their rein because it will ensure their party will lose the next election so leaders are not making the responsible decisions so that our nation can have a gradual descent as opposed to a disastrous crash. Moreover, the nation will soon have to deal with a growing geriatric population and the unfunded entitlement payments of Medicaid, Medicare and Social Security, which will have to come out the pockets of working adults, which means much higher taxes.

The last Depression in America, known as the Great Depression, was the result of a banking crisis and not the stock market as people erroneously believe. Low interest rate and reduced lending standards flooded the economy with money and people invested much of that money in the stock market because the returns were much greater than the interest they had to pay on the loans. People borrowed money, because it was so cheap, just to buy stocks and hence the demand pushed up stock value. It was easy money until the stock market tanked and people defaulted on loans and banks went under. The same thing is happening today, interest rates are low, lending standards have been compromised and a lot of money had been invested in real estate because it offered the greatest returns. The demand has severely overvalued home prices. It’s the same scenario but with a different investment vehicle, real estate instead of stocks.

I mean, come on, how counter intuitive can you get. Mortgage companies and their “sub prime” lending were driven by rapid appreciation of home values. The counter intuitive act is the idea of charging people, who you think is a bad risk of being able to make their payments, more via high interest rates. If a person is a bad risk for paying back 500 dollar a month mortgage, he or she is even less likely to pay the 600 dollar mortgage that result from the higher interest rate you charged. If anything, lowering the monthly payment will increase the probability that it will be paid on time, not increasing monthly payments. However, lending institution figured that since home prices were rising so fast, they would have a house that was worth more than when the mortgage was taken out, plus they would have earnings from interest payments made up until foreclosure. However, now that home values have declined, the greedy plan is all mucked up. Now lending institution are stuck with properties with declining value as they foreclose which threatens their solvency.

I don’t know what to tell you folks other than to start getting prepared for a depression. I don’t want to sound overly dramatic or pessimistic but our decline is inevitable. The only question is whether it will be a crash/depression or prolonged and frequent deep recessions. Certainly the latter is preferable but the policy of our leaders is promoting the former due to politics. No party will make the tough decision while they are in charge because they will be universally unpopular and ensure the party will not be reelected. Everything in America is short term oriented dealing with GDP, reelection and quarterly profit reports to woo investors to purchase stocks. We have masked and borrowed and put all hands on deck. We have lowered taxes and interest rates and flooded the economy with money….now the whole thing is primed to go “POP” at any minute now.