What's Different About "This" Recession?

 

I am often scolded by my liberal friends about how this past recession (2008) was different, we almost had an economic collapse, it was as bad or worse than the Great Depression, and various other items all underscoring the need for "more stimulus". They claim that we tried lower tax rates, etc.


A quick look at the composition of the stimulus spending in the American Recovery and Reinvestment Act of 2009 (see chart) reveals that the major portion of the spending was to transfers to state and local governments (mostly used for fiscal relief, which is temporary), transfers to persons (temporary) and "Tax Cuts" - almost all of which were temporary in nature. Temporary measures simply cannot provide permanent economic growth. They run out (as they already have), and you end up with more of the original problem that has never been solved in the first place. Plus - an even bigger debt burden.

Stimulus
There are not many cases of economic collapse in modern history and in most cases the economies made a slow but eventual recovery. Interestingly, the advent of crisis has been traced to asset bubbles (e.g., real estate) or imbalances in the financial systems which broke down and paralyzed the real economy. Only after purging out bad debts and driving asset prices to lows, with employment levels and wages severely reduced, have the economies begun a painful and long standing process of recovery.


During such economic turndowns, deflation is a normal part of the rebuilding process. Overblown markets bottom out, prices stabilize, and the process of recovery ensues. What is different about the 2008 crisis is that instead of allowing this normal deflationary process to take place, the Federal Reserve (which, like politicians, is terrified of deflation) began an expansionary monetary policy to attempt to "shore up" the real estate, banking and investment system in the US. In fact, the Fed has printed over $3 Trillion in fiat money in just the last three years. All that has accomplished is to make us all poorer due to the debasement of our dollars.


What this does is that instead of encouraging the economy to rebound, it creates a rolling recession where asset classes never fully bottom out and recover normally. That is what is really different about "this recession". A misguided stimulus, and misguided monetary policy.

Comments

  1. Excellent article however as a point of fact Deflation is the natural state of a truly capitalist system.

    i.e. the technology sector.
    i.e. Laser eye surgery
    i.e. the 1870s which most modern economists think of as a depression, but wasn't because the purchasing power of every American went, up, the price of goods went down, and real wages went up. (and the dollar appreciated versus gold as thus was worth more). In fact the 1870s were a time of unparalleled growth in prosperity.

    But of course Keynesians won't look at it that way because it disproves their entire theory and proves the Austrian viewpoint.

    The problem is Say's Law. That is wrong production. Our economy massively is producing things that people don't want. Be it houses, or banks or even desktop computers. In the case of houses and banks the wrong production is because of government interference. In the case of desktop computers it is a normal shift from one technology to another that isn't really harming the economy. More to the point, people are so in debit that the only thing that they want to spend their money on is getting out of debit, so almost everything is wrong production because savings is more important right now. Which of course is the right thing to have happen!

    But make no mistake, this depression we're still! in is caused by wrong production, not as Keynesians would lead you to believe lack of spending. But then all recessions/depressions are the result of wrong production and not lack of spending. If produce things that people want, they will buy them.

    If you are more productive (i.e. efficient) you will get wealthier, both the business owner and the employees that produce more in the same amount of time. Production is how wealth is created, not money printing and government hand outs. Those just destroy the productive class.

    Let's reset and truly understand economics. The left has economics completely backwards and it's killing this country.

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