Wednesday, January 27, 2010

The End of the Great Depression Was World War II, is This Where Are Headed?

The very well-known Mish Shedlock from Global Economic Analysis talks today about something we have discussed here a few times, and our greatest fear. The current country debts will never be repaid unless they are wiped out (officially, or by currency devaluation/inflation, fast or slow).

Devaluation against what is the question, since all major economies are in the same boat. Unless we are willing to concede that the new world reserve currency will be based on India's China's and Brazil's. Those countries may not be happy, nor ready, for that.

Mish says that Greenspan had two choices in 2003:

1 - Take a hard recession then
2 - Take a depression later

He chose number 2. We are not in it right now, it does seems as it has been postponed in the hope that it is averted. However, Mish says the current economic recovery is a mirage.

"Mistakes of 1937 did not sink the US back into depression. The plain fact of the matter is: It is virtually impossible to spend ones way out of a popped credit bubble.Do not mistake Federal spending for a recovery. Indeed this "recovery" is a mirage. There can never be a clear recovery financed by debt when the problem is excess debt in the first place. Logically the idea is nonsense".

"All stimulus did back then was create housing and debt bubbles. Then it crashed anyway. Now supposedly the cure is more spending?This is what we face now: As soon as stimulus is taken away, the downslide begins. How many times can you pave a road or grant cash-for-clunkers? Eventually what little pent-up-demand there was is exhausted, and the stimulus ceases to have an effect.

This idea of Keynesian "priming the pump" is sheer nonsense. It has never worked and it never will work. Japan and its national debt to the extent of 200% of GDP should be proof enough. The only thing that can possibly work is the writeoff of bad debts, something both the administration and the Fed are reluctant to do. We can either do this now, or drag it out for two decades like Japan, only to end up deeper in debt.

What ended the great depression, and let's hope it does not come to that again, was WWII and the destruction of capacity everywhere but the US.Spending $5 trillion dollars would not do a damn thing now other than wreck the dollar and create another bubble. Look in the mirror and repeat after me "It is impossible to spend one's way out of a debt bubble". Given that it is impossible, it's ridiculous to try.

Thus the real lesson of 1937 is don't blow debt bubbles in the first place".

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