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DEATH GRIP OF DEBT
RECESSION OR DEPRESSION
Posted by: Darrell Castle
January 13, 2010
Topic: Bankruptcy
There is an old adage that goes something like this; when your neighbor is out of work, that's a recession; when you are out of work, that's a depression. Many things are happening in the economy right now as a result of the decades long build up of debt both public and private. Robert Farrell who was a market strategist with Merrill Lynch before he retired used to list what he called his 10 market rules to remember. Number two was that excesses in one direction will lead to opposite excesses in the other direction. The excess of credit and the debt based economy that has been present for many years will result in excess in the other direction to bring the market back to the mean, or average, so it can grow again. Now frugality is popular again. People are saving not borrowing. The other old adage is something like this; he who goes borrowing goes sorrowing. The book of Proverbs tells us that the borrower becomes the slave of the lender. People find themselves nervous and fearful of what's ahead for them economically. The economy will have to deleverage or get rid of the excess debt before people can be expected to engage in credit and reignite another debt based economic boom. When a nation's economy is based on credit and debt, false signals are sent to the market causing it to react in false ways. People buy on credit as if they had real money and each buy is a market signal to build more stuff for which there is no real market. Factories are built and workers are hired to produce goods for which there is no real market. When credit contracts, either intentionally by bank action or naturally through market forces, the whole thing comes crashing down. The federal government, in its view, cannot let that happen because it would mean a deflationary depression and the politicians would be punished in the elections. Their tactic then is to build the house of cards ever bigger hoping that someone else will have to deal with it. The bigger the house of cards gets, the bigger the mess when it falls. This contraction of credit and resulting crash is what happened in the fall of 2008 and the government has been resisting the crash since then. The means of resistance include pumping printed money into the economy, bailing out one segment or another of the economy, taking control of industries and stimulus by pumping money into projects.
One wonders if borrowing more money will ever be a successful cure for a problem caused by too much borrowing. One also wonders if this "recession" will be solved and the economy boom again, or will it dissolve into full blown depression. Time will tell but in any event, get out of debt as soon as possible.
