Monty Pelerin at AmericanThinker had a great column yesterday, where he explains clearly the coming economic collapse:
We are headed for an event that history will record as worse than the Great Depression. It is unavoidable… The principal reason for the dire prediction is the level of debt outstanding. Current debt levels are simply not sustainable. Assets and cash flows cannot support or service this debt.
No economic recovery can occur without massive debt reduction. As shown below, current debt is much higher than the 1930s:
He clearly points out the reality of governments trying to “manage” the economy to prevent downturns:
Economic downturns are both normal and necessary. Individual and business mistakes are remedied via economic slowdowns. Misplaced capital and labor is freed up for more productive uses. When this cleansing does not occur, an economy becomes less efficient and grows at a slower rate. The mistakes remain in place and are perpetuated.
Government intervention is not corrective. It is a cover up of prior mistakes. The phrase “pretend and extend” describes what happens. Instead of allowing the economy to correct, government attempts to avoid the correction and the pain by covering up the mistakes. That has been the history of much of the last 80 years. Continued interventionism brought the economy to this crisis point.
There is no other alternative cure for the economy other than de-leveraging.
Governments around the world will attempt to avoid de-leveraging because of the associated pain of a Great Depression. Unfortunately, that is not possible as Ludwig von Mises pointed out:
There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
Prior attempts to avoid corrections got us to this point. Now the supply of credit has been exhausted and taxpayers deeply indebted. Another coverup is not possible.
The conclusion, which he does come to, is that we must let the de-leveraging happen and reduce the total debt (personal, corporate and public) to fall back to a reasonable percentage of the economy. And the de-leveraging is going to stagnate the economy for years. But we must let it happen or else we will find ourselves in a hyperinflating economy with a crash that will make 1929 seem like a walk in the park.
1 comment
Cynical Bard
1 November 2011 at 21:27 (UTC -6) Link to this comment
I have been amazed for about 40 years watching governments and individuals who seem to believe that you can borrow money continuously and there will never come a time when the debt must be paid.
In Canada, during the 1993 election, the Reform Party campaigned on the need to balance the budget withing three years.
Jean Chretien, then Liberal PM said:
“There is no need to balance the budget, as long as we keep the deficit to be no more than 3% of GDP. ”
He based that on the European Union criterion, but if the GDP grows at 3%. or less the proportion of the GDP that goes to government spending, and essentially unproductive activity, will necessarily increase. It is then not a question of whether a disaster is coming, but when.
By 1995 Chretien et al, started to balance the budget and later claimed it was their greatest achievement, which of course, it was.
Today we see Canadian politicians claiming that health care spending should continue to increase at 6% per year, forever.
With the economy growing at 2%, the disaster is foreseeable, for anyone who is not blinded by ideology. This is not a question of ideology, but mathematics. And you can’t cheat on mathematics.