Better the depression you know

Posted on July 28, 2011

0


As the warnings of calamity and peril find us almost oblivious to their meaning, we have become split into two camps, the usual ones but still. There are those of us who believe a default will be catastrophic to the economy while massive cuts would only serve to worsen still shrinking consumer demand and a clean debt ceiling increase is in order, and there are those of us who believe that default is either a mathematical issue of little consequence or an opportunity to free the private sector of federal intrusion on the marketplace.

To support their arguments each group suggests exactly the same thing, that the others idea will ruin the country. Clearly there are some issues with the definition of the arguments that are being made, so lets clear some of them up.

If the US defaults on its debt then it is a mathematical certainty that America will enter a new period of contraction, how long this would last is unclear but a portion of the federal debt would be left unpaid and would have to come out of the economy somehow. It would take two months for the United States to officially enter a recession, however if it took that long to raise the debt ceiling we’d have bigger problems.
The issue of what would cause the economy problems seems to be the deciding factor here. The first camp; Camp Catastrophe, believes that if US debt is left unclarified (or rather the last $2 trillion of it, which is the purpose of the debt ceiling) then the single most secure bond in the marketplace will become unstable, creating a rift in the economy that knocks everything else leading to increased interest rates, even tighter lending and eventually what would be called a depression.

In the second camp we have …. well, the Tea party; those who believe that government involvement in capitalism is the worst abomination man has levelled upon himself. With the increasing levels of spending on the part of the government the Tea party feel that the private sector is constrained from growth and this will cause permanent stagnation of the economy.

As is always the way in American politics, the duopoly has still failed to capture the correct answer. The US dollar has become the defining character of the global economy, most of the world’s countries hold it as a reserve currency, yet if it fails they will move on. The economy will contract most certainly, interest rates will rise, yet these remain the characteristics of a recession.
The federal debt is growing and a large portion of the deficit is comprised of stimuli and bailouts, yet these are a sliver of the total debt. Businesses don’t spend because there is nothing to spend their money on. Consumer demand flickers from growth to contraction from month to month, yet the Tea party believes the private sector can overcome this?

Consider the state of the economy from your home. High unemployment, closing stores, rising prices, pressure on wages and working hours. It is very difficult to get a loan for anything over a few thousand even for those with excellent credit ratings, such as my mother with her dedicated ‘shoe-shopping’ credit cards. It does seem strange that the Dow Jones Index can’t seem to penetrate the 13,000 mark, the FTSE can’t keep its head above 6,000 for more than a couple of days and the NIKKEI loving clings to its 10,000 points like a desperate commitaphobe.

Before I round off my train of thought let us review the etymology of our potential economic future.

  • Recession. A contraction in the economy of a country lasting two quarters or longer. Easy to spot while it’s receding.
  • Depression. No single concrete definition, probably because it comes in so many forms. It’s noteworthy however that it probably comes in the form of something depressing economic growth.

Now let me get to that rounding off I promised. High unemployment, low liquidity, rising prices, fewer businesses are all ultimately creating one fatal flaw in the economy, no consumer demand. This is the cancer that is depressing the rest of the business cycle and preventing growth. In case you aren’t following the bold typeface, I am suggesting that the economy is currently in a depression, and has been for a while. There is no real definition for the word but its literal meaning seems to speak to our current situation better than any other. This depression is a vicious cycle where low liquidity from the  ‘Credit Crunch’ has depressed consumer demand, which in turn depresses business production, which depresses employment and wages, which depresses liquidity again.

The cycle was preempted by the stimulus and TARP, however it was directed at the wrong end of the cycle. Floating business production to a level where it can operate at the same pace as before does nothing to fix the problem of consumer demand, maintaining the current position does not, after all,  increase the ability of consumers to spend, it keeps it the same. Removing government stimulus entirely from the economy will only free the cycle to begin again, forcing us back into a downward spiral. The only logical solution is instead to move the stimulus to the other end of the cycle, to liquidity in consumer wage volume. Only by increasing the number of consumers through new, temporary jobs created with stimulus money can the cycle be mended to a point at which it can regain its momentum and re-enter the dominion of capitalism.

Advertisements
Posted in: Economy