If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution. Messrs. Barack Obama, Benjamin Bernanke and Timothy Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second--if at all. Therefore, it is not wise to count on them to tell us when the Great Recession is over, or to provide a plan to prevent another one in the future. The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks. The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt. Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt. During this latest economic contraction, the Federal Reserve took interest rates to near 0%, and the Obama administration is leveraging up the public sector to record levels in a bid to re-leverage the private sector. The government's philosophy is tantamount to sticking a frostbitten man in the freezer so he won't have to suffer the pain associated with the thawing of his extremities. During the Great Depression, real gross domestic product plummeted 32%. The Great Recession, which we are still struggling through, began in December 2007, according to the National Bureau of Economic Research. In contrast to the 1930s, GDP during this recession shrank only 3.6% from the fourth quarter of 2007 through its low point in the second quarter of 2009. Between the fourth quarter of 2007 and the first quarter of this year (the most recent period for which data is available), GDP contracted a mere 1.1%. The contraction in GDP during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. To put that number in perspective, household debt did not go back above 50% of GDP until 1985. It was not until the first quarter of 2009 that household debt once again approached the Great Depression level of 100% of GDP. Between the start of the Great Depression and the end of World War II, household debt fell from 100% to just above 20% of GDP. Getting there was a painful process, but such de-leveraging was the only real cure for an economy swimming in debt. Thanks to government efforts to carry on our debt-fueled consumption binge, during today's Great Recession household debt has barely contract at all; it fell to 92.5% of GDP in the first quarter of this year. To make matters even worse, during this current crisis our government's response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.
National debt did rise dramatically during World War II, topping out at 120% of GDP in 1946. But consumer debt plunged concurrently. So while the nation was adding debt to fight and win a global war, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle. Today, gross national debt and household debt are both at or above 90% of GDP for the first time in our history. Many observers--unfortun There are two problems with this Keynesian theory. One is that government spending doesn't increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts. The result is that the country is left with a private sector reducing a massive overhang of debt. As households curb spending, GDP slows, and the ratio of debt to economic output grows even further. Since we have yet to address the real cause of this recession, we are moving inexorably closer to causing The Greater Depression. If policymakers do not understand that the progenitor of a depression is debt, they will also be unable to provide a genuine solution. Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
http://in.groups.yahoo.com/group/investwise/
INVESTMENTS IN INDIA
We are low-risk, long-term investors.
Stocks, mutual funds and the entire investment gamut. Only financing/investment avenues in India will be discussed.
For any assistance, questions or improvement ideas, contact investwise-owner@yahoogroups.co.in
****************************************************************
NEW! ==== Check our LINKS and FILES sections for a world of information. REGULARLY UPDATED.
NEW! ==== Check "Tracklist" in Links and Files sections for Investment Ideas.
****************************************************************
No comments:
Post a Comment