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It is Impossible for this to be a Depression

Our government and their esteemed economists tell us that we are coming out of the recession. Using their statistics, they claim we are on our way to economic recovery. According to them, there is no possibility of a double-dip or another Great Depression.

Yet these are the same people that never saw this economic debacle coming and are primarily responsible for causing it. To them, a Depression is impossible. Apparently they never learned the valuable lesson I did early on in my career.

In my first post-MBA position, I received a rude awakening on my very first assignment. During a presentation to a wizened senior finance executive for one of the world’s largest companies, I answered one of his inquiries by stating that something was impossible. I have never forgotten his wise rebuke: “Son, the impossible has a 20% probability.” Those were the days before “black swans” had been invented, but I had been exposed to the true meaning of “impossible.”

By definition, the impossible is, well, impossible. However, what we perceive to be impossible often is not. Many people live their lives hour by hour and day by day with no perspective of history and little time for reflection or analysis. History, for them, is what happened yesterday or last week. Their knowledge of the world is narrowly experiential.

Without real knowledge of history or ratiocinative analysis, their concept of the “impossible” becomes quite large. For many, if it did not happen in their lifetime, it is “impossible.” My old mentor, upon reflection of their parochial perspectives, might reasonably have upped his definition of the impossible to 50%. Naivety and narrowness affect perceptions, but not necessarily outcomes.

We are in a period where what was thought to be impossible is regularly occurring. How many believed that it was in the realm of possibility for the icon of American capitalism, General Motors, to declare bankruptcy and be nationalized? What about Chrysler Corporation. Five or ten years ago most considered these outcomes impossible.

What about Merrill Lynch, Bear Stearns and Lehman Brothers, all major players and revered names on Wall Street? Or AIG? Some “experts” had buy recommendations out on some of these companies just days before the “impossible” happened.

How many thought that housing values going down was impossible? The genius running the Federal Reserve thought that was impossible across all markets. How many foresaw the stock market collapse (or rebound)? Wall Street experts certainly did not see the decline. (They always see advances, even when it is implausible to do so.

Who thought that the financing of homes would be nationalized through Fannie, Freddie and the FHA? What about Student Loans? Who thought the monetary union of EU could be on the verge of break-up?

I submit that most of these outcomes were unthinkable for a large section of our population. Even so-called “gurus” were surprised. For most, all of these events were overwhelmingly considered impossible just a few years ago. Yet, they all happened.

This economic morass is hardly over. It has a long way to run, and we will witness many more “impossibilities” as it runs its course. Our lives are about to change forever, and most people do not believe that is possible.

Many believe we are coming out of the recession. We are not! Why do they believe this? The government and media pound them with that notion. That is often the sum total of their information. That information, a wanting to believe and the fact that we have always come out of recessions in the past is all that is required for the uninformed.

We have reached the point around the world that Bill Bonner so cleverly stated: “The entire world economy rests on the consumer; if he ever stops spending money he doesn’t have on things he doesn’t need — we’re done for.”

I believe we are heading deeper into a depression with a not unreasonable probability that it will be more severe than the 1930s.  Our economy has actually been in decline since the mid to late 1970s. Our standard of living temporarily soared because we indulged ourselves with OPM (other peoples’ money), otherwise known as debt or credit. We did not make or earn enough for this standard of living to be sustained. Nor do we earn enough to pay off the horrendous debts incurred.

We cannot print or borrow our way out of this mess. As Albert J. Nock wisely observed: “It is an economic axiom as old as the hills that goods and services can be paid for only with goods and services.”

Debt maxed out recently. Now we are in a debt contraction that will bring private and public debt back to normal levels. If you want an approximation of how much debt will have to be reduced, try $30 Trillion for a rough number. That is more than two full years of GDP.

Of course this debt liquidation will not occur in two years because that is impossible (other than via massive defaults). Likely it will take a couple of decades, much like what Japan has been going through. They believed their current situation was “impossible.”

We will not be in a depression for a couple of decades. We will have negative to sub-normal growth in incomes, GDP, standard of living, etc. Future growth, once it resumes, will be on a lower glide-path than we have traditionally experienced. The policies that caused this are many, were implemented over decades and now are exacting their toll on the economy.

Keynesian economics has papered over many cycles since the 1960s. The economy has appeared to recover quickly from downturns, but at a serious cost. The malinvestments of each cycle, instead of being liquidated, have been propped up via credit expansion and more poor investments have been made.

Eventually the economy drowns in credit and collapses because it is built on a foundation of sand (unwise asset allocations and investments). We are at that point after many, many years of foolish politically-motivated interventions. Credit, the relative structure of prices and the composition of capital are no longer sustainable in their current state. Karl Denninger of The Market Ticker explains the roller coaster cycle rather nicely in A Sobering View of Macro Economic Reality

The corrective steps necessary to take us out of insolvency and (soon-to-be substantially) under-performing economy are politically unpalatable. It is unlikely that politicians will willingly dismantle the welfare state, a requisite to returning to health. Thus, markets will likely take the system down.

In the meantime, you will get the continuing stream of “happy” fairy tales from Washington, CNBC and their like. But we are cooked! Mathematically there is no way out without major defaults. (See Spiraling to Bankruptcy and Welfare States R.I.P.)

Some, perhaps many, of the pols know this. Some believe they can escape one more time with another application of the poison that is killing the economy. Unfortunately, this economic patient has reached his limit. The next dosage probably cannot be large to affect anything without killing the patient.

Not subject to anything like an Hippocratic oath, there is no question how politicians will  behave. “Try it, it is our only chance” is their motto. Unfortunately when they say “our” they are referring to themselves rather than the citizens they are supposed to represent.

Our end will be just another ”impossibility.” The collapse will be triggered by an hyperinflationary Depression. Keynesians will tell you that cannot happen, it is “impossible.”  Wait and see.

Also, you might want to prepare for this next impossibility.

5 thoughts on “It is Impossible for this to be a Depression”

  1. Pingback: The Isaac Brock Society | Blame Canada : Who is next in the United States grab for power?

  2. Pingback: Pahempaa kuin lama | “Monty Pelerin” - Pasi J. Matilainen

  3. Sounds as if it’s time to learn all we can about growing food and brush up on survival skills.

  4. a harrison smith

    Yes :its historic indeed 2010
    As a student of history and filosophy
    Its hard to see how we will get out of this if unwilling to “sacrifice”irrelevant luxuries but especially “jobs for pals in government”
    It may lead to war:which is biblical in scope and devastatio
    N.
    Noah and job come to mind: very unfashionable these days
    Hollywood is going to be the MOST surprised!I cannot wait to see their smug endorsements of castro and friends bring them to personal bancruptcy: then perhaps reality and “common sense” can be shown to normal busy citizens worldwide.
    Relevant to normal peoples job loss experience or survival in a world filled with nihilism masquerading as morality and is just a senseless free for all:
    With someone else money
    :astonishing to STILL read hatred of ms margaret thatcher
    In UK and s africa!!

  5. Thanks for these reflections on the “impossible”. It is helpful warning for every investor.

    My reading of history is that the most devastating destruction of economies is war (e.g., WWI, WWII)–war causes many people to lose all their wealth, if they manage even to survive. Many are so used to wealth, that we would not no what to do if ever we hit rock bottom.

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