Great Depression Online Archive Issue:

Alternative Two

Great Depression Online
Long Beach, CA
November 04, 2008

Inside This Issue You Will Discover…

*** The Last to Know
*** The Flipside of Credit
*** Alternative Two
*** And More

“Now, here, you see, it takes all the running you can do, to stay in the same place.  If you want to get somewhere else, you must run at least twice as fast as that!” – Red Queen, Through the Looking Glass, by Lewis Carroll

The Last to Know

“Evidence of a recession piles higher with new data,” reported a headline from AP over the weekend.

Did you need a higher pile of evidence to know we’re in a recession? 

To anyone who suits up and shows up to work everyday, near regardless of what industry, it’s been obvious for at least a year that the economy’s receding; not proceeding.  But that’s the droll entertainment of observing the economy…the economists are the last ones to know just what the heck is going on.

For example, from the story referenced above, “The Commerce Department reported consumer spending dropped a sharp 0.3 percent in September while their incomes, the fuel for future spending, managed only a small 0.2 percent gain.

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“That followed a report a day earlier that the U.S. economy shrank by 0.3 percent in the third quarter.  The accepted definition of a recession is two straight quarters of a shrinking economy.”

So, by definition, economists won’t know if we’re in a recession until sometime late next January when the fourth quarter GDP numbers are crunched, massaged, and fashioned for publication.  In the meantime, peering through our looking glass, we observe that it takes all the running you can do, to stay in the same place…and more and more are falling behind.

The Flipside of Credit

But that’s what happens when an economy’s enfeebled by too much credit.  Sure it was fun while it lasted.  As free flowing credit pushed up income, spending, and growth over the last 30-years, people felt wealthier, smarter, and even special.

Yet few bothered to ask: Where is all the money coming from?  In other words, few noticed that it was all a fraud…

…that the money supply was increasing several multiples faster than the economy was growing.

…that it took five dollars of credit to produce one dollar of new growth. 

…that asset prices were increasing faster than incomes. 

…that it took a two income family to keep up the standard of living that one had before.

…and that a consumer led economy leveraged to the hilt was a temporary illusion of prosperity.

Through it all a self reinforcing confidence pervaded that some how, some way, it could continue forever.

But, painfully, we are learning about the flipside of credit…debt.  And that when debt is above and beyond what the real economy can service, things go haywire.  Banks collapse, businesses fail, families go bankrupt, and entire streets fall into foreclosure.

And then things really get ugly…

Alternative Two

Government blockheads come up with blockheaded plans to fix the economy.  Industries are nationalized, bailout packages are larded up and dribbled out, new acronyms come into existence, Presidential candidates strut and bluster their idiocy, and the federal funds rate is pushed down to 1 percent.

And while the problem originated from too much credit, the ultimate solution from the commanding quacks is more credit.  For the alternative – letting the chips fall where they may – is too unthinkable to consider.  But, regrettably, the endgame resulting from extending more and more credit is even worse.

Here we’ll attune our ears to some grave words, spoken by a dead man…

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”  Ludwig von Mises, Austrian Economist (1881 – 1973).

Based on their actions to date, it appears the Federal Reserve, the Treasury, and Congress have already selected their endgame alternative…and we’ll have to live with it. 

Hold on to your hats, dear reader, we’re going for alternative two…’a final and total catastrophe of the currency system involved.’

Sincerely,

M.N. Gordon
Great Depression Online

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