We all know that we’re in the midst of the worst economic crisis since the 1930s. However, just recently the Chairman of the Federal Reserve declared the recession to be ‘very likely over.’ I don’t have a crystal ball (and I suspect Ben Bernanke doesn’t either), but it seems there is a good chance that the optimistic assessments on Wall Street and in the halls of power are wrong.
Instead, the evidence indicates that a ‘double dip’ recession followed by an extended period of economic downturn may become the second Great Depression. This is already evident by the increasing rate of unemployment in September, falling US auto sales (that ‘cash for clunkers’ thing was a total bust)’ and a falling dollar, which makes anything we import (clothes, electronics, cars), more expensive.
The mainstream economists and pundits don’t want to acknowledge these truths… just like they didn’t want to acknowledge the warning signs we saw for years before the current crisis. They want to keep the discussion about our nation’s economic situation so complicated that the average listener ‘tunes out.’
The reality is that our problem is very simple and can be understood by using a metaphor in which a car symbolizes the economy. Borrowing money is like stepping on the accelerator, which generates economic growth. When you stop borrowing, it’s like taking your foot off the pedal.
However, when you borrow money, you accumulate debt. Imagine that debt like a huge load in the trunk of your car. The greater the load, the harder it is to accelerate… the harder you have to press the pedal and the more strain you put on the car and the more gas you burn to achieve the same result.
Sometimes you need to slow your car down, just like economists sometimes want to slow the economy down. Right now they talk about ‘deleveraging,’ which is a sophisticated way of saying it’s time to pay down the debt and increase savings. This process is like stepping on the brakes, which slows you down even faster. That can be a good thing, but the braking process isn’t always smooth when you’ve got a flat tire and a huge load in the back that is shifting around. If you can’t anticipate exactly how the car is going to handle, things can get messy in a hurry.
If you remember the story of the Titanic catastrophe, it wasn’t just hitting the iceberg that caused the problem; it was the faulty design which allowed so many bulkheads to fill from what should have been a minor problem, and the overconfidence of the crew and their mistaken belief that the ship was indestructible.
Our economy is in a similar situation, with a rather modest series of economic events cascading upon the back of an economy built on a faulty design (debt), and a crew at the helm that is both arrogant and inexperienced. I’ll let you guess who the Captain of the Titanic is.
Just like with the Titanic, things were aggravated when some people who should’ve stayed behind to help with an orderly transfer of passengers off the boat were the first into the life rafts. Today some of our best talent is leaving the country for opportunities in foreign lands where tax rates are low and the regulatory burden isn’t so high. (It’s hard to believe that one of the top destinations is actually China!) Others, like the officers on the Titanic, are just standing around, telling people not to worry.
Can you imagine if the Captain of the Titanic had decided that the best way to overcome the flooding was to gun the engines to the max, hoping that he could drive the ship faster than the water was coming in? Well, that’s the Stimulus Program, Bank Bailout, Insurance Bailout, Auto Company Bailout, Cash for Clunkers program, and soon, ComradeCare (I mean, National Health Care).
The financial crisis that was both predictable and could have been mild has been aggravated by the same ruling class that arrogantly prolonged and worsened the first Great Depression. Only time will tell if this one will be worse.