The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It

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 Markets and Money 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 almost 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.

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 Richebächer, 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 the money. Eventually, that debt will have to be paid.

During the entire last half a century leading Western economists imagined a world that couldn’t exist for one minute – where consuming wealth makes people wealthier…and where simply making more credit available can stimulate consumption. 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.

In the first four U.S. recessions after the Great Depression, from the mid-’30s through the mid-’50s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds – witless, as usual – often 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 programs.

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 program cost the U.S. 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 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 at Markets and Money. 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. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States of America. This response is 3 times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. 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.

Until next time,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It"

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Sid Saxby
Dear Old Hatters, Salty herring is best served with a sour dressing! Thanks for the relief that your corporate wit has provided over the past 2 years that I have followed this post, the truth has been made a little more palatable, and I believe that I have been getting the right “food to digest” by reading your material. In the midst of the correction, we wait for banks of the world to stop propping up their bottom lines by hoarding easy cash. While they choke off the economies and denude the wealth of western nations, the Chinese nation converts… Read more »

This one may make you smile………during the 20th century Australia suffered the labour party 5 times…… Tney bankrupted us each time.. .. Guess who’s in power right now ?… Cheers….Geo

There were eight Labor governments in the twenty century according to Wikipedia. Two of those Labor governments have immediate relevancy for Australia today. The Scullin Labor party came to power an the end of the post-WW1 war boom. The nominal high in the Dow Jones peaked six weeks before Labor took office in 1929. The Whitlam Labor party came to power at the end of the post-WW2 war boom. The nominal high in the Dow peaked four weeks after Labor took office in 1972. The Rudd government came to power just as the post-Cold War boom, arguably, came to an… Read more »

Touche’ Watcher!

I didn’t know that about the Labour gov’s. Poor things. I really do feel for them, getting the rotten end of the economic stick as soon as they are in power.

Not to suggest in any way that Rudd is doing a good job. Because he’s not. But what would Howard, Costello, or Turnbull be doing? Its easy for them to say they’d be doing great by comparing the last decades growth figures. The reality is that any Australian Gov. would have gone along for the ride on that bull market.


It’s time that we all got a copy of a CD that’s currently going the rounds called ZEITGEIST….. WATCH THAT AND THEN TELL ME THAT ANY GOVERNMENT IS TRUSTWORTHY……..Geo

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