When Will This Recession End?

Recessions are natural processes in any free market economy. They usually happen when severe "excesses" build up. You can compare them to a forest that is overgrown with excessive dead wood, leaves, and dry underbrush. At some juncture, a lightning strike will take it out so that the forest can grow anew and without all that dangerous tinder.

The formation of "this" recession wasn't just the housing market and the bunch of toxic home loans. There was an excess in spending in America with no savings and a massive increase in credit card debt. Too much credit gave this country the purchasing power that it wasn't entitled too. All these things placed high levels of demand on the housing and consumer markets; which, in turn, resulted in higher and higher valuations of our homes and massive increases in the number of stores for consumer items. To top all that off, our Federal government, too, was living off of borrowed money through deficit spending.

Recessions end when the excesses are purged. For this recession to really end, all those excesses must somehow be shed from our economy. Unfortunately, the Obama administration would prefer to delay the inevitable by propping up failing companies and toxic assets with bailout money after bailout money. Bush did this too, but nothing to the extent that we are now seeing in the Obama administration. Worse yet, one of the excesses that is seriously growing out of control with this administration is the dramatic increase in government spending and deficits.

Somewhere along the line, the chickens will literally have to come home to roost. Companies with too much debt and falling sales will have to be allowed to fail and reorganize or go under due to bankruptcy. People in homes that they can't afford have to be shed from the system. Corporations in trouble will have to automatically adjust excessive pay and benefits, and government spending has to get under control.

People are already lowering their credit card debt through reduced consumer spending and savings. That's a good thing. But, our governments at the local, state, and federal levels still haven't come to grips with this economy and aren't willing to reduce spending and move away from the notion that governments are the mommys and daddys of the people. And, that's a very bad thing.

Normally, recessions work themselves out in about 16 to 20 months. That's why a lot of economists believe that no action may actually result in a faster recovery. But, we know that politicians won't let that happen. Politicians always have to look like they are doing something; even if the something is doing more harm than good.

All of the above then brings us to answering the question that was posed in the title of this blog entry.

I think we are creating an even harder row to hoe than need be, because of too much bleeding-heart government intervention. It's that simple. The Federal spending is too targeted to easing pain and is not focused on the real factors that will get this country moving again. Most everything that is being done is a band aid to treat the symptoms and will not force a real cure. I see an emotional response to people being out of work and people losing their homes and not a rational response to the "why" that is driving all this economic blood letting. The "why" is lack of consumer spending and the overall lack of credit availability for both people and business.

A perfect example of this is the auto companies. While the Federal government is pouring billions into saving those companies, the people who could really save those companies, the consumers, aren't buying cars. They're not buying them from GM, Ford, or Chrysler, and their not buying them from Toyota, Nissan, or Mercedes, either. While there are structural problems in the U.S. auto companies that are making them insolvent, the lack of consumer activity is just exacerbating those problems. If the consumer was back in the game, the downward slide of those auto companies would be greatly lessened.

The broad base of consumers are in retreat and the Stimulus package will only benefit a small fraction of that consumer base. It is literally designed to directly benefit union workers in automotive manufacturing, light and heavy construction, through-high school educators, law enforcement and fire fighting personnel. All of this is simply political payback and will have no effect on getting the workers in the service industries or other areas of manufacturing to start buying things. There will be some benefit to the workers in the support areas of building materials and in raw materials such as concrete and asphalt; but, in the overall scheme of things, that will be minuscule. All the union jobs in this country combined, still only add up to less than 13 percent of the active workforce . That means that the Stimulus Package is really ignoring 86 percent of the total workforce.

Even when this country starts to stabilize, there's going to be a big tax debt to pay off. Further, all that debt that was and is being accumulated will only devalue our currency and force the cost of imported goods to rise rapidly; and, the buying of imported goods makes up the bulk of this country's consumer activity. We have literally become a "Buy Chinese" country. This will be the start of rampant inflation. This will force wage pressures; and, the resulting compensation for wages falling behind prices will only push prices even higher. Wage inflation is one of the most difficult aspects of inflation to control. Traditionally, it is wage inflation that refuses to abate in any inflationary recovery as workers try to match their wages with the higher cost of things. Wage inflation only dissipates when wages and prices have reached some broadly acceptable equilibrium.

I think we're headed in the same direction that Japan was with their lost decade or longer of stagnation and inflation. I've read and listened to many a commentary and I am consistently hearing a chorus of concern about what is being done. These people aren't politically motivated or have a love-bias towards Obama. Most, I think, are actually Democrats. These are people who are realists and who have lived through the Carter recession and have done a lot of research into the Great Depression and what was done in the 1990's in Japan.

Now, to be fair, it is possible that the influx of spending in those concentrated areas of economy such as infrastructure rebuilding will actually have a "spreading" effect as predicted by all those academics who seem to be advising Obama. However, academics aren't hardly noted for being attuned to business or the realities of our economy. It's easy to make theoretical predictions without any economic impact on your own personal financial situation. Its extremely rare to find an academic who's theoretical work has actually benefited themselves financially. That's the problem I see with Obama. Too much theory and not enough practicality. And, that's just my opinion.