| | By now, I've been siding more and more with the people who believe that we will have another depression of the same scale as the Great Depression. The stock market has gone down much, but I think the worst is still to come -- there is going to be a day when everyone is going to be trying to sell everything on the same day.
I also think that we will see a big failure in Keynesian economic policy. Now, Keynesian does have some point, by and large lot of economists today subscribe to it where if you keep expanding the economy and encouraging mild inflation, that is a good thing. Keynesian also believes that recession or depression is avoidable by lowering interest rate.
Problem is, Keynesian economic policy misses one vital part of the equation. That of the consumer demands, let alone the problem that you cannot have a whole nation in debt and I'm talking about the $9000 credit card debt an average American has. Anyways, why do I say consumer demands? If you think about it -- what you want to buy today differs substantially from what you want to buy even 10, and most definitely 30 years ago. This means that what the businesses need to be producing today has to differ from what businesses are producing 20 years ago in order to satisfy the consumers. If businesses fail to adjust to consumer demand, then it is fair for that business to collapse.
Now, consider that, for many years we have had low unemployment rate. Less than 5% is definitely low. The problem with low unemployment rate is that if most people are employed, and you are a businessman who has a very good idea that will really make consumers happy, it is harder to find workers. Especially good workers, because those workers would already be tied up in employment in another area of the economy that has less of a consumer demand.
This is why career mobility and occasional unemployment period, including recession (or depression) is essential for a thriving economy. When unemployment is high, it is now easy for business that really do serve the consumer's desire to find workers. Especially since there are many workers willing to work, and sometimes even for less than they used to earn in the past. As opposed to what Keynesian are trying to say: recession shouldn't be erased off of the map, recession should actually be embraced as an essential component for our advancement as a nation.
The problem, however is that because Keynesian economists don't see it that way, they try to stop any recession as they show. This maintains the status quo of where people are working, and interferes with the effort of the economy to realign employees with consumer demands. This is why Japan had a depression for so many years, despite repeated efforts by central banks to lower interest rate and even pay companies to employ "window sitters". In another words, the effort to fight recession (including the Feds lowering interest rate to 1% and keeping it there for 1 year in 2003-2004) actually prolongs the problem, and further stretches the distortion in the economy. It would be nice if we could prolong the corrections indefinitely, but the problem is it isn't possible to prolong the correction indefinitely. The efforts to prolong it only increases the number of problems that has to be corrected. When correction finally comes, it is even bigger, and worse than if we had never bothered to try to fix the problem in the first place.
In another words, in a true free market, there are cycles, yes. But those cycles aren't as big as the cycles we see when there is a central bank trying to smooth out the cycle as much as possible. As I explained, the central bank actually makes the cycle bigger.
As for what to do in an event of another Great Depression -- now might be the time to look into what industries you think would be most in demand during a time like this. Problem is that a depression itself can distort things because in this instance, there is a credit crisis. This would make it harder for new businesses that would meet consumer demand to raise to the fore (especially when you have Feds lending to existing businesses to the potential detriment of those that have a fresh idea that would be successful). Furthermore, there is also the fundamental problem that lot of our consumers are in debt, so even if they want something, some of them can't afford it.
As for debt, I think it is part attitude of the consumer, part federal government policy that actually discourages saving, and part the accessibility to easy credit (fueled by Federal Reserve). It will have to be unraveled, and I think that is why we will probably see (and in a sense we need) a depression.
-Tim |
| | Posted 10/11/2008 6:05 PM - 15 Views - 0 eProps - 0 comments
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