Friday, February 6, 2009

When the "Stimulus/Spending" fails: what then?

Could it be that we have now moved from a recession to a depression? Bill Bonner, thinks so...

He was also the first to put in writing the thoughts about the U.S. following Japan's decade of funk, with his book Financial Reckoning Day, that was published about 6 years ago! So... I stop to listen to what he has to say... I don't always agree, but I sure do listen, for his track record is good... Recall, he also coined the "Trade of the Decade" at the turn of the millennium... "sell the DOW, and buy Gold on the dips"... That's worked out quite nicely, eh?

Courtesy of Bill Bonner: a scenario to think about: full story here: (

"In a recession, the basic plan or formula for the economy is still valid.The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold a new burst of production can begin.

But in a depression, the problems are structural.

One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can't pay if off - because you don't have enough income - you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can't pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on. Imagine, for example, a guy who built a nationwide chain of stores just to sell ipods to teenagers. The business may have been a great success - for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: 'I'll just get some more financing...and wait it out.' But who's going to lend to him? By the time the kids begin buying again, ipods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.

A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.

How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses?

We don't know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led a post-WWII consumer-led economy."


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