Tuesday, December 02, 2008

So we're in a recession?


Now credit card issuers are sucking $2 trillion out of the economy, adding yet more deflationary pressure to the economy. Deflation is bad for people who owe money because they can't repay their loans, yet the credit card companies appear intent to cause deflation. Deflation is also bad for merchants because they bought their goods at the old cheap dollar higher price and now can only sell them at the new expensive dollar lower price, meaning they lose money on their goods. Capitalism only works with a little bit of inflation to "prime the pump", so that debts get paid off in cheaper dollars and goods get sold off at a higher price than what they were bought for. So deflation, if it continues, is going to be a b**ch.

The current response of the Federal Reserve and Treasury constitutes pushing on a string -- pushing money into the banking system in hopes that the banking system will lend it out. But a) the banking system is showing no sign of lending the money out, and b) even if they wanted to lend the money out, there's a shortage of people who can afford to repay loans, so they'd have trouble lending it out. You'd be better off dropping bales of $100 bills out the back of a fleet of helicopters if your intent is to re-inflate the economy, at least those $100 bills would go to buy stuff and thus provide jobs.

But in the end Congress is going to have to vote for a major jobs program, one which removes tax incentives for outsourcing and adds tax incentives for creating jobs right here in the USA, one which offers direct hiring CCC-style to work on repairing our crumbling infrastructure and clean up our roads and parks and etc., i.e., a new New Deal. Either that, or we face the potential of the recession deepening even further into a new Great Depression, and unlike the 1930's, we don't have the infrastructure or social capital in place to deal with a Depression -- no extended families anymore, no large number of factories that can be put back to work to employ people anymore, no experience with "living rough" anymore, etc. You can't keep pushing on a string and expecting the other end of the string to move. People need money and jobs to pull on their end of the string before pushing on the string will have significant effects. Otherwise, all you're doing is shoving one end of the string around -- and getting nowhere.

-- Badtux the Economics Penguin

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