The bright side of contraction and deflation, from Bill Bonner, at davidstockmanscontracorner.com:
The Coming Resolution
We’ve been exploring how the credit bubble resolves itself. Inflation? Deflation? Are we locked in to a long, long period of stagnation, slump and economic sclerosis?
Yesterday, we shared our research department’s forecast for the short term: Based on simple regression-to-the-mean logic, it suggests that the “most likely” course for US stocks over the next three months is a loss of more than 6%.
Today, we give you our long-term forecast.
Little by Little or One Savage Blow
“This is the most negative ever,” says our chief number cruncher Stephen Jones. It shows a loss of 9.8% every year for the next 10 years. In other words, our mean-regressing-, debt- and demography-adapted model also seems to be pointing to a long depression.
But an average loss of 9.8% per year over 10 years can happen in a number of different ways. Little by little. Or in one savage blow.
A foreshadow of the long depression crossed the planet like a total eclipse of the sun twice in the last 100 years.
The first time was America’s Great Depression. You know that story. Stocks crashed. Businesses went broke. People lost their jobs. Banks failed. Events were following the typical depression script, which probably would have bottomed out and recovered within a couple of years – as happened in the Depression of 1921.
But then, the federal government stepped in. It froze prices, including the price of labor. It cut off trade. It blocked liquidations. It arrested the progress of the correction.
Murray Rothbard analyzed the policies of the Hoover and Roosevelt administrations in his 1963 classic, America’s Great Depression. He showed how government, trying to stop the Depression, actually prevented it from doing its work.
The short, quick deflationary shock – which should have slashed bad debt, bad businesses and bad investments – turned into a long, agonizing slump. The Depression, which should have been over by 1933, continued until the 1940s and was only ended then by the biggest public works spending program in history – World War II.
This, by the way, did not actually make people better off economically, but it “put people to work” and largely disguised the drop in living standards which that war and the Depression had caused.
http://davidstockmanscontracorner.com/let-there-be-deflation-it-works/
To continue reading: Let There Be Deflation—It Works!
