The seriousness of our situation becomes clearer by reading the analysis that fills the airwaves, print media, and the Internet. Most of it is wrong, as the full extent of it is too vast to see. This post attempts to show put events in a larger context, and consider how to fight our way thorough this crisis.
(1) It is not a sub-prime mortgage crisis – the deceptive narrative for so many critical months. Not a mortgage crisis, a real estate crisis, or a crisis of the finance industry. This is the culmination — the inflection point of the post-WWII debt supercycle. See the links at the end for more information.
(2) We have not hit the climax point. We are still in the early innings, as the full effects of the coming recession have not yet hit. That will likely be as severe as the 1973-75 and 1980-82 recessions; it might be the worst since WWII. The stresses of that recession will break additional links in our economic system, creating the climatic events that will mark the trough — the inflection point leading to eventual recovery.
(3) Our response has been most seriously hindered by the optimism of our leaders, both public and private. Let’s consider them separately.
Nodes of influence in the network of America
Our private sector leaders have been optimistic, more so than the man-in-the-street (as shown by sentiment and confidence polls). We have heard happy-talk not just from most corporate leaders, but also from influential voices on the Internet. Despite the long and steady darkening of economic numbers, they promulgated delusional optimism.
Google “Dude, where’s my recession” to see specific examples. They are the equivalent of radio stations urging people to ignore the evacuation warnings — the hurricane will not hit us! The volcano will not erupt. Disregard the sirens, stay on the beaches — the tsunami warnings are fake, or just a short-circuit of the alarms.
As I said on June 3:
Economic statistics work for us like the whiskers on a cat. As we move into the unknown future, they hint at what lies ahead. Almost all US economic numbers have decelerated over the past 2 or 3 quarters. This is a clear warning signal, but useful only if people act on it. Build savings. Be careful when starting new projects or switching jobs. Carefully watch the risk in their households’ balance sheets.
Nobody can say what comes next — economic science is immature, the data too poor — but ignoring the data is imprudent, even foolish. Those who write commentary that casually dismiss this data do a disservice to their readers. The ‘where is my recession, dude’ meme is not funny, and imo actively harmful. The web gurus who propagate this reenact the story of the grasshopper and the ant, acting as cheerleaders for the grasshopper. Most Americans are not adequately prepared for a downturn, so this cheerleading could have unpleasant consequences for some of their readers.
We no longer have time for such nonsense. Everyone must prepare as best they can, and consider how to help those without sufficient resources to face what is coming. Each of us knows what to do, at least with respect to our own business and family.
The paradox of government warnings
Should the government have sounded the alarm, warning of the onset of a potentially severe recession — risking panic which might make the recession certain, immediate, and severe? Or was happy-talk the correct choice, hoping to maintain our spirits — our spending and investment patterns – while the economy’s natural resilience carried us to safety?
This goes to the essence of our problem. Warnings would have helped a well-founded nation, with a budget government surplus after a long boom, a neutral trade balance, whose households had adequate savings. We would have trimmed our sails slightly, but no drastic changes would have been necessary. These moderate preparations would have weakened the economy further, but insured that it would be mild.
But crazy folk operate in a different world. Massive government deficits after a long boom, national consumption 5%+ above our income, massive foreign debts after a 20 year-long binge … the government could not risk a sudden return to sanity. The crash of sudden withdrawal from our debt addiction was to painful to contemplate. As at every point along the road to this crisis the solution was to muddle through, as corrective action could wait until tomorrow. Until a better time, a new year, a new administration.
We have to be able to accept the truth from our leaders. We have to demand the truth, accepting nothing less.
Promises of certain success have marked each of the many (who can keep count) plans announced by Bernanke and Paulson since the down cycle began in December 2006. Even now it may be that their newest plan is failing, rejected by our creditors (watch the US dollar and treasury yields). if so they will need a new plan, or an expanded version of the current measures. Let’s dampen the criticism, as they are doing the best they can under impossible conditions. In return let’s get some honesty about our situation. They rightly fear our reaction to something so unprecedented in the modern era.
While we grapple with rapidly changing events, struggling to understand the full magnitude of our problems, the calls goes out to find the culprits. This is a democracy, and certain the guilty cannot be us. No matter how pressing the crisis, we have time to debate who has the greatest responsibility. We furiously recite the mantra of 21st century America: It’s not my fault.
We can get through the difficult times ahead. Keep our cool and avoid panic. Remember our history and our values, neither of which should be abandoned in the search of temporary security or prosperity. And make you voice counted in the November elections. Our new leaders will be amongst the most important we have ever elected.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Originally published at Fabius Maximus and reproduced here with the author’s permission.