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Why Do We Want a Recovery?

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May 02, 2012 – Comments (17)

Board: Macro Economics

Author: EddieLuck

So many people (including the latest METAR Sage) advocate various schemes for producing a "recovery". Why?

All that has happened is that GDP has lost the fraction of itself that was unsustainably produced by an absurd growth of private debt to levels beyond what the economy could support. Now that that debt growth has stopped, GDP has slowed. Do we want to revive private debt growth to the levels of 2006/7 and have another almost-identical crash? Of course not. It would be much better to just resume normal economic growth from this lower level of GDP, once we got debt ratios down to a more normal level.

Wait though. The federal government has raised its rate of debt growth enormously in response to the 2008 crisis and the enormous deficits since then are holding GDP about 8% higher than it would be with a balanced government budget, even assuming zero knock-on stimulative effects of the deficits. Therefore, real or natural GDP would be 8% less than it is now if our debt incurred through our government stopped growing.

So what are we hoping for? Personally, I'm hoping for the rest of the slump to happen after we fall over the "fiscal cliff" and after the federal deficit is cured, so that we can at least reach a bottom from which we have a chance of growing. The recovery that the fed and others are trying to provoke would just be a return to insane debt growth, bankrupting the country, borrowing from the future: call it what you will. It's just insane, just like the idea of propping up insolvent, stupidly-run financial firms at taxpayers' future expense. Let them go and a lot of debt will be extinguished through default and bankruptcy.

The sooner our government understands that its deficits are anathema to our long term future prosperity the better. The sooner people realize that all this constantly- accelerating debt growth is reckless, childish, and certain to fail the better.

The sooner America understands that unlimited debt-fueled economic growth is an adolescent fantasy, the sooner we can drop our GDP to its proper level and go back to building on that.

Well, you say, that would cause a depression. Sure it would. That's obvious. That is exactly what we have created by our personal and public policies, and that is the bridge (to the future) that has to be crossed before we can achieve anything that could be called "recovery".

Desperately trying to produce real, sustainable economic-expansion-through-debt-growth from where we are now is just ridiculous. What part of history shows that that is achievable? What is the logical basis for saying it is possible? Why wait until the entire world is sucked into the unsustainable-debt-growth vortex before coming to our senses? Why wait for the mass poverty, starvation, and war that will follow a worldwide crisis before calmly assessing the actual situation?

It seems so simple to me, so plain and obvious. Is everyone so emotional that they can't think straight when faced with a lower standard of living? The contrast between the fortunes of Japan and those of Iceland since their respective crises should make things quite clear, even for someone who doesn't believe history.

Ed.

17 Comments – Post Your Own

#1) On May 02, 2012 at 11:15 AM, ryanalexanderson (< 20) wrote:

Fantastic post. My honour to give the first rec!

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#2) On May 02, 2012 at 2:23 PM, miteycasey (95.99) wrote:

re-election...that's the only reason this doesn't happen.

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#3) On May 02, 2012 at 3:43 PM, Valyooo (99.82) wrote:

I don't think debt is always a problem, I think the problem is bank credit and government debt.

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#4) On May 02, 2012 at 8:28 PM, awallejr (82.46) wrote:

Well, you say, that would cause a depression. Sure it would. That's obvious. That is exactly what we have created by our personal and public policies, and that is the bridge (to the future) that has to be crossed before we can achieve anything that could be called "recovery".

So just to "test" your theory we need to let the economy collapse (which was being called for by those lunatic Schiffites).  We'll let millions more suffer because we need the ashes so the Phoenix can arise anew.  Only a V shaped recovery will do.  Fortunately calmer heads with actual power have been prevailing.

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#5) On May 03, 2012 at 9:35 AM, FlyingCircus (< 20) wrote:

Wishing for a default/bankruptcy/debt crash to happen is as helpful as wishing our economy and government operated as we did in 1930 or 1880.

 Nobody with sense wants social services, pensions and state-run operations to go from over-generous and blatantly corrupt in some cases, to zero.

Social Security, Medicare and union collective bargaining arrangements need to be scaled back to some fairer, more reasonable, financially supportable level. But it wouldn't take much. In addition the national investment bank-legislative oligarchy/trust needs to be broken up.

We need oversight and independent "financial committee" veto over our corrupt elected officials at every level. And our citizens need to pay attention and manage these despicable thieves.

If we could manage to change the direction the ship is going through approaches like that, then we may get on a stable, slow growth, sustainable path.

But wishing for a crash/depression because of a default isn't helpful. Dismayed this got POTD.

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#6) On May 03, 2012 at 10:25 AM, Valyooo (99.82) wrote:

awallerjr,

We shouldn't do chemo to cure cancer, because it causes pain?  We shouldn't spend years in school because it will make us more money in the future? We should eat that yummy dessert because it tastes good now, disregarding the negative effects it will have later?

Sometimes you deal with bad situations now, so it's not worse in the future.  Is that not the concept of investing?  Lock up your cash so you have more later?

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#7) On May 03, 2012 at 11:51 AM, awallejr (82.46) wrote:

We weren't talking about investing with the intent on making money or treating a medical condition with the hope of improving survivability.  We are discussing economic policy.  And what the author is suggesting is pretty much what the Schiffites were arguing back in 2008.  Fortunately those in power didn't listen.

In the end it is a prognostication that one's policies will lead to a desired result.  Except what is the author's desired result?  A pipedream. I submit there is no such thing as permanent sustainable economic growth.  It is cyclical in the end.  So we torture people now  to have say 7 years of good times for the lucky survivors only to deal with the next economic calamity and rinse repeat?  That is Darwinistic.

It is easier for a tweny year old, for example, to deal with calamity and disaster  than say an 80 year old.  So far we have managed to avoid a true calamity and we are slowly, but steadily improving without having to cause suffering on God knows how many millions more. 

Personally I think that is a good thing.

 

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#8) On May 03, 2012 at 12:20 PM, ETFsRule (99.90) wrote:

Let's see if I am following this. The poster believes that deficits somehow stunt economic growth, and he believes that plunging the economy into a full-fledged depression will somehow help us in the long run. Of course, he provides absolutely no facts, data, or statistics to support that theory.

I'll pass.

"The contrast between the fortunes of Japan and those of Iceland since their respective crises should make things quite clear, even for someone who doesn't believe history."

Please, elaborate.

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#9) On May 03, 2012 at 3:05 PM, Valyooo (99.82) wrote:

 That is Darwinistic.

Why is that a bad thing?  The world is Darwinistic. 

It is cyclical in the end

Yes but the cycles would be muchhhhhhh smaller.

Without the fed and leverage, do you really think we would have had such a collapse in 2007-2009? if so PLEASE explain how.

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#10) On May 03, 2012 at 5:07 PM, ETFsRule (99.90) wrote:

"Without the fed and leverage, do you really think we would have had such a collapse in 2007-2009? if so PLEASE explain how."

Huh? Before the Fed existed we always had more boom-and-bust cycles, larger bubbles, and longer, more severe recessions. And it wasn't because of leverage either.

For instance:

"The average duration of the 11 recessions between 1945 and 2001 is 10 months, compared to 18 months for recessions between 1919 and 1945, and 22 months for recessions from 1854 to 1919."

It's pretty simple: people pay too much for stuff. Then the bubble bursts. 'nuff said.

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#11) On May 03, 2012 at 5:08 PM, ETFsRule (99.90) wrote:

.

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#12) On May 03, 2012 at 5:09 PM, ETFsRule (99.90) wrote:

Oh and my quote is from here. It's worth looking at.

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#13) On May 03, 2012 at 5:20 PM, TMFDiogenes (91.06) wrote:

One reason: Because we have massive, unneccesary unemployment that's ruining the lives of millions of people through no fault of their own.

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#14) On May 03, 2012 at 6:36 PM, awallejr (82.46) wrote:

The world is far more civilized, although there is much more work needed.  Europe not fighting any major wars for over 60 years is pretty amazing from a historical perspective. But just because other places are jungles, that doesn't mean we need be.  Too many callous people, I swear.

Honestly you think an elderly person living off of social security stands any chance in Ed's world?  Or a seriously autistic or mentally handicapped person?  They're the first ones out on the street (unless they have supportive family).  Please watch the movie The Grapes of Wrath with Henry Fonda.  Sure a lot of melodrama but it really does give you a picture of what life was like back during the Great Depression.  And that was one of those "cycles" that could always happen again and again.  In fact Ed wants another.  No thanks.

 

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#15) On May 03, 2012 at 6:50 PM, awallejr (82.46) wrote:

". . . we have massive, unneccesary unemployment . . . "

Yes to massive but it isn't "unnecessary" but inevitable as a result of so many jobs built around a bursting bubble with no quick place to reabsorb them.  What would be unnecessary would be the further declines if we followed Ed's advice.

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#16) On May 04, 2012 at 1:10 AM, Valyooo (99.82) wrote:

Would you support letting mentally retarded people into Harvard? Would you want a blind surgeon? No. The world does not operate that way. Some people get screwed, fed or no fed. Yes elderly people would be screwed, but college students wouldn't 

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#17) On May 04, 2012 at 1:20 AM, awallejr (82.46) wrote:

Your last blog Val makes no sense, sorry. We aren't talking about faceless people getting screwed.  We are talking about millions of additional people getting screwed needlessly.  Start imagining real faces on those statistics.  As Stalin said, "A single death is a tragedy, a million deaths is a statistic."

Sounds like you are willing to trade off the elderly for college kids. Let the strong will out over the weak.  Happily we do have responsible leaders who feel otherwise.  Listen to Mayor Bloomberg's budget conference yesterday as an example.  In 30 years you will think otherwise.

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