The ‘D’ word
Accuse me of being a scaremonger, an ignoramus, a member of the pinko-commie media or any other epithet that comes to mind.
Accuse me of being a scaremonger, an ignoramus, a member of the pinko-commie media or any other epithet that comes to mind. But here’s my take on the current economic situation: we’re in the early stages of a depression that will get deep and weird.
Now that I’ve uttered the “D” word, there are two questions that you, the skeptical reader, may ask.
First, on what do I base my claim and, second, even if I’m just partly right, what do we do about it?
Let’s start with my rationale for calling this a depression.
At the core, it’s a matter of supply and demand. Our nation’s supply of capital, particularly of the real estate variety, has been built up excessively over the past decade or so. We have sufficient, up-to-date capital for whatever manufacturing activity we still do in the nation. Probably more important, our overseas providers of manufactured goods — China, mainly — now have plenty of capacity to meet our needs.
With adequate capital stocks, owners of capital have no need to expand capacity.
Factor in that U.S. consumers have been spending not only their entire income over the past several years but billions in borrowed money too, and the basis of true demand — our concrete ability to pay for our limitless wants — shrivels.
In short, with limited demand, producers see no reason to expand or to hire, driving the economy into a downward spiral.
Call that simplistic, but I challenge you to come up with a way for the private sector to increase aggregate demand, which eventually drives capital investment.
A slump in capital spending is what happened in the 1930s. Only after 1945, which marked more than a dozen years of very little capital spending aside from the war effort, did investment pick up. Manufacturers and others saw that their equipment had worn out or was inefficient and enticed by the wad of forced savings sitting in consumer bank accounts after World War II, they started hiring. This created the post-war boom.
Now we’re on the downward slope. This doesn’t mean that the world will end or that the United States is finished or that there will never be good times again. It just means that it’s going to take years until we work out the excess capacity and producers see a real reason to invest.
In the meantime, the government is going to be borrowing and spending enormous amounts of money. The money will keep people from starving and put millions to work, but I doubt it will bring back prosperity as quickly as we hope. Remember, even after all the New Deal spending starting in 1933, the economy slumped deeply again in 1937. The massive spending this time may kick off unprecedented inflation. We may see the weird phenomenon of a depression combined with runaway inflation. Impossible, say the economists.
Yeah, and remember how right the economists were about 2008.
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