If one does not know the real
cause of a problem, they should also be unable to provide a genuine solution.
Messer's Obama, Bernanke and
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 ask them if the great recession is indeed over,
or for them to provide a plan to prevent another from occurring in the
future.
The cause of the Great Depression
in the 1930's and the Great Recession beginning in 2007 was an overleveraged
economy. An overleveraged economy is the direct result of
artificially-provided low interest rates from the central bank and
superfluous lending on the part of commercial banks. That easy money provided
by banks eventually brings debt levels in the economy to an unsustainable
level. At that point, the only real and viable solution is for the public and
private sector 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.
However, all efforts on the part
of our politicians today are to fight the natural healing process and to
promote the accumulation of more debt. During this latest economic
contraction, the Fed took interest rates to near zero percent and the
administration is leveraging up the public sector to record levels in order
to re-leverage the private sector. The government's philosophy is tantamount
to sticking a frost bitten man in the freezer so he won't have to suffer the
pain associated with thawing off his extremities.
During the Great Depression, real
GDP plummeted 32%. According to the National Bureau of Economic Research,
this Great Recession--which we are still struggling through--began in
December of 2007. In contrast to the 1930's, during this recession GDP shrank
only 3.6% from Q4 2007 to its low point, which was reached in Q2 of 2009. And
from Q4 2007 to the latest reading on output in Q1 2010, GDP contracted a total
of just 1.1%.
But the contraction in GDP which
occurred 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. The only other year it approached that level
was in Q1 of 2009. To put that number into perspective, after the depression
ended Household debt did not go back above 50% of GDP until the third quarter
of 1985.
From the start of the depression
to the end of WW11, Household debt fell from 100% to just above 20% of GDP.
Although it was a painful process, it was the only real solution to an
economy soaked in debt. But today, thanks to government efforts to carry on
our debt-fueled consumption binge, this current Great Recession has witnessed
Household debt barely contract at all; it fell to 92.53% of GDP in Q1 2010.
To make matters even worse, during
this current crisis our government's response to the economic contraction has
been to dramatically increase their borrowing. At the start of the great
depression, gross Federal debt was just 16% of GDP. It peaked at just fewer
than 44% by the time the depression ended. So while the National debt did
increase significantly during that period, it still was relatively benign
when viewed from a historical perspective. At the start of this Great
Recession, the gross National Debt was 65% of GDP. Today it has exploded to
90% of GDP! Therefore, if you compare the relatively innocuous level of debt
in the 1930's with that of today, it clearly illustrates the perilous state
of the economy.
While it is true that the National
Debt did rise dramatically during WW11 (120% in 1946), consumer debt plunged
concurrently. So while the nation was adding on debt during the process of
fighting and winning the Second World War, households were taking the
necessary steps to ensure their balance sheets were well prepared for the
aftermath of the battle.
Today, for the
first time in our history both the gross national debt and household debt are
at or above 90% of GDP.
Many are contending --
unfortunately most of those in power at this time--that the government must
spend more while the consumer contracts. Their hopes are based in the belief
that once the economy gets going they can unwind that debt. There are two
problems with this Keynesian theory. One is that government spending doesn't
increase GDP; it only serves to choke off private sector growth. And the
other is that the government never believes it's ever a good time to pay off
the debt incurred. Therefore, the country is left with a private sector that
is contracting and with a massive overhang of debt. That contraction in
growth exacerbates debt to GDP levels even further.
Since we have yet to address the
real cause of this recession, we are moving inexorably closer to causing The
Greater Depression. And a long period of debt reconciliation still lies
ahead.
If one does not understand that
the progenitor of a depression is debt, they will also be unable to provide
the genuine solution, which is deleveraging.
Michael Pento
Senior Market Strategist
Delta Global Advisors,
Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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