The Solution to a Depression is a Depression

The Dow gained 106 points yesterday. The dollar gained ground too – rising to $1.27 to the euro. And gold rose too…plus $12 to $914.

In the United States, jobs are being lost at the rate of 6 million per year. New jobless claims just rose to a 26-year high.

Little by little, the word “depression” is creeping into the press. Yesterday, GE’s top man warned that the downturn could turn into a depression. And Britain’s Prime Minister, Gordon Brown, let slip the d-word during a parliamentary session.

The TIMES of London reports:

“Gordon Brown appeared to acknowledge for the first time today that the world economy was heading for a 1930s-style ‘depression’.

“Mr Brown stumbled slightly over his words at Commons question time, just a week after admitting that Britain was facing a ‘deep’ recession.

“As the financial gloom deepens, he told the Tory leader David Cameron today: ‘We should agree, as a world, on a monetary and fiscal stimulus that will take the world out of depression.'”

But not to worry…the simpletons are on the case. The price tag on Obama’s emergency plan had risen to nearly $1 trillion last time we looked. The Senate bowed to global scorn and ridicule, taking out many of the “Buy America” provisions. Of course, they didn’t do it as a matter of principle…they don’t have principles. Instead, someone must have warned them that if Americans insist on “buying American” the Chinese might insist on “investing Chinese.” And then the whole game would be up. The Ponzi scheme that is U.S. finance requires new money from foreigners in order to pay off the old money that foreigners put in last year and the year before.

The news this morning is that the senators burned the midnight oil…taking out the protectionism and putting in more boondoggles – including a $15,000 tax break for people who buy houses.

So, here at Markets and Money, we have no worries. The feds are on the case. And they’re going to spend, spend, spend…until daddy takes the T-bird away!

*** Wait a minute. The feds are on the case…but haven’t they been on the case for the last 18 months…ever since Bear Stearns went broke? And wasn’t Tim Geithner right there in the room when they decided to let Lehman Bros. go broke…while saving AIG?

Albert Einstein: “Never expect the people who caused a problem to solve it.”

And aren’t the feds’ new plans to save the economy little different from their last plans? Bailouts, stimulus, tax breaks, new, looser credit…aren’t these the same things that were used not only for the last 18 months…but in the Great Depression in the ’30s…and in Japan in the ’90s? Have they ever worked? Nope. Never.

Of course, there’s a good reason they don’t work. As we explained yesterday, you can’t really buy your way out of a depression. Because the problem is deeper than that. The economy is not just taking a rest. It is dead. It needs to be restructured, not revived. And for that, the old structures must be destroyed. That’s what Schumpeter’s ‘creative destruction’ is meant to do. But the feds don’t appreciate it. They talk “change,” but the only change they want is for things to go back to the way they were. So, they’re trying to stop the correction. And they’re using every worn-out trick, every blunderbuss weapon and every claptrap theory they can think of. Bailout the banks…create a ‘bad bank’…nationalize the banks…stop the foreclosures…send out checks…lower interest rates…build bridges to nowhere – they’ll do it all. But it won’t work. All these measures are designed to encourage consumption…in order to support the old structures. But more consumption is just w ha t the economy doesn’t need. It is in trouble because people have spent too much. Now, they have to cut back…and when they do, every enterprise, speculative investment, and household that depended on excess consumption is in trouble.

Ah yes, dear reader…that is where we are. In trouble. At the beginning of a depression. The old structures must be swept away to make way for new ones.

Change! Can it be stopped? Yes we can’t!

“So, what’s the solution?” asked a colleague this morning, after we explained why the stimulus programs cannot work.

“The solution to a depression is a depression,” we replied.

*** Here’s another idea that won’t fly, abolish America’s central bank, the Federal Reserve. From our old friend, Dr. Ron Paul:

“From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial ‘boom’ followed by a recession or depression when the Fed-created bubble bursts.

“With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America’s exports or the low rate of savings should be enthusiastic supporters of this legislation.

“Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

“Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

“In fact, Congress’s constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true free-market economy.

“In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.”

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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7 Comments on "The Solution to a Depression is a Depression"

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Hilary Smith
Welfare state policies are an important part of a stable society. Welfare state policies keep people from snapping their wallets shut during an economic downturn. How can this logic escape the attention of the Right-wing pundits/media/politicians/? In addition, welfare state policies keep the population from dwindling because women are able to work and comfortably raise a family. That’s something I would include in my definition of “freedom”. But gosh, Social Darwinism sure is dying a slow death. Also, duh: they can’t use the gold standard because in capitalism wealth becomes consolidated (funneled up) and pretty soon only a few powerful… Read more »
James Acton

Ron Paul – seriously?

Joyce Taylor

well written, well argued, very convincing, I couldn’t agree more.


If I earn $100K and have a $350K mortgage even though leveraged on an income to debt ratio of 350% there is no problem.

UNLESS each year that passes I add 20% more to my overall debt than I take home in pay (including pay increases)

The only way I as an individual or a Government can ever get out of debt is to earn faster than the debt increases and currently that is not going to happen either at individual or national level

Dickens said it far more succinctly. Annual income £20 annual expenditure £20 and six pence – result misery.

Nick, when you took that ratio you would have had to have foreseen your income and expenses through the life of your loan. Child bearing & rearing & education all weigh, however that sunny disposition from your 70’s asset stealing Whitlam wage break out remunerated parents telling you that getting in over your head always works out creates a culture that levels all the countervailing numbers. If you think you can increase your income past all the extra expenses and the long period of drop in your partners net income after childcare then you might have a chance of not… Read more »
Ross, I’m sure we are saying essentially the same thing. Obviously if you take a $350K mortgage on a $100K income it is subject to the premise that the outgoings to pay for the mortgage can be made within both your current expenditure from the $100K and should include a prudent and reasonable assumption of likely future commitments. I use the ratio because that is the traditional one in house prices/ earnings (3.5/1) and that is what my parents did. My point is that many people, and businesses, in the last few years have with little or no justification made… Read more »

cheers Nick. most will come however to not trusting their parents’ views in Australia. For a safe long term ratio try Germany or even France & the USA up til the 90’s. For investment and rental again try the German regulatory system and rights and obligations for renters.

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