Bill Bonner: an even greater depression

By Bill Bonner May 01, 2009

Bill Bonner.

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Like a simple village priest in St. Peter's, or a drunk at the Guinness gate, we are amazed, dumbfounded, in shock and awe at the woeful majesty of it. Flies wander in and out of our gaping mouths - we can neither close our jaws nor still our pounding hearts.

Not infrequently, governments 'shoot themselves in the foot'. But in the current event, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off. Readers are reminded of our Back Page Law: 'The force of a correction is equal and opposite to the deception that preceded it.' Today, we offer a corollary: 'The greatness of a depression is commensurate to the government's efforts to prevent it.'

Since these iron laws seem to contradict everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head: "The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable..." explains Germany's chancellor. She went on to suggest that maybe we shouldn't repeat the errors of the past.

She was referring to the last half century. During that time, leading Western economists imagined a world that couldn't exist for one minute – where consuming wealth makes people wealthier and where consumption can be stimulated simply by making more credit available.

Each time the economy slowed down, the authorities induced people to buy more of what they didn't need with more money they didn't have. This produced 'growth'. But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.

As a proxy for 'deception' in our handy dictum, substitute 'money'. And now consider it in its two misleading forms – credit and deficit spending. "Credit not backed by real savings is a fraud," the great economist Kurt Richebacher used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy.

Deficit spending by government is a flimflam too. Governments rarely have extra funds to spare; they have to borrow it. Eventually, that debt must be paid.

In the first four US recessions after the Great Depression, from the mid-1930s through the mid-1950s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds – witless, as usual – increased them or left them alone. But deficit spending went up an average of 2.2% of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.

As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period, an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new 'growth' the feds were after, but all the accumulated debt and mistakes from previous stimulus programmes.

In the recession of 1973, Brookings Institution economist George Perry told Congress that "we should be pulling out all the stops" to fix it. The resulting fiscal and monetary stimulus programme cost the US 4% of GDP, according to an estimate by Jim Grant. Future generations of fed governors and Treasury secretaries found more stops – and, of course, pulled them out too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2% of GDP, according to Grant.

The problem with 'eventually' is that it has a way of showing up when you least want it to. The deceptions of the Bubble Epoque, 2001-2007, were enormous. The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke.

That this will result in more misery is a foregone conclusion –at least, here on the back page. The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded.

France's deficit is running at 8% of GDP. The UK is running a deficit of more than 12% of GDP. And America is mobilising as if it had been attacked by Martians. On the credit side, they have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13trn has been pledged – an amount equivalent to a full year's annual output of the United States of America. This response is three times more (adjusted to today's dollars) than the US spent to fight World War II. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.

It is, we will guess, what makes a great depression even greater.

Published in Economics | More articles by Bill Bonner

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