How I learned to stop worrying and love the recession

Original Date:10/13/2008

So it looks bad, really bad. The stock market is plummeting, huge banks are going bankrupt, the credit markets have frozen and all this corporate welfare doesn’t seem to be helping. It sure looks bleak for our future. Mad Max is right around the corner, where we all armor our cars (after converting them to run on ethanol) and start killing each other for food and safe investments.

At least that’s the picture you’d get if you listened to our alarmist media and politicians. “We’re headed for a new Great Depression!” they scream at you on the 24 hour news outlets. “Buy Gold, everything else is so much worthless paper!” Nonsense. The real key is to keep in mind how little these people know about history, how often they are wrong about things (Christ, has anyone in authority been right about anything in the past 8 years?) and how they’ve learned to use Fear as a motivator for ratings or political support. As a student of history, and someone competent in macroeconomics, I’m here to allay your fears, which is a big part of fixing the whole problem.

First lets talk about the Great Depression, so I can show you that this is nothing like that. Several factors led to the depression, and many are debatable, but lets focus on the major ones.

1. Half of the industrial world bankrupted the other half after a costly and destructive war.

2. The American stock market became filled with ignorant investors and stock without real value.

3. The topsoil from southern Nebraska to Northern Texas blew away after a devastating drought and decades of reckless farming techniques.

4. The gold standard and wait-and-see policies by the Fed kept money in short supply.

5. Government isolationist policies sent the economy into a tailspin.

Here’s the good news: only #2 is evident in today economy. The bad news? We may be over-reacting in not wanting a depression, and therefore could be taking actions with detrimental consequences, like inflation. These bailouts may be the answer, but they may also force growth by forcing inflation. Personally I would’ve let the irresponsible bastards wither and die.

Here’s how we got where we are today: During the .com boom everyone and their mother entered the stock market, often buying stock with no knowledge and from companies with no real goods and experimental services. When that bubble burst the government didn’t want negative growth (the bane of any capitalist economy) so they moved the investment over to the housing market, deregulating the mortgage system and encouraging everyone, even those who could in no way afford it, to buy a home. Banks re-package the debt they gained from these home loans and sold them to other banks, calling it income on both ends and inflating their perceived earnings. Then the loan payments stopped coming when people hit their real interest rates on these “sub-prime” loans. Banks lost their income from repayment of debt, and those that had been heavily invested in this bad debt started to fail. Since there’s little transparency in the banking system trust between the banks evaporated and the credit market froze. Then came the panic from ill-informed investors, and that’s where we are today.

The key thing to keep in mind here is that, as it stands right now, this is a problem in the housing, banking and finance sector, and not in the economy on every level, unlike in the Depression. Goods are still being produced and demand still exists. The market was overvalued, and that’s being corrected. The real key to making sure this doesn’t get any worse are those 2 great words of wisdom from Doug Adams: Don’t Panic! And here’s why:

For people in my financial situation, and most of you on my friends list, a recession is a GOOD thing. If you don’t have any investments but have a stable job a recession doesn’t negatively effect you, in fact it presents you with a great deal of opportunity. Massive debt and the rich-poor gap are the two major problems in the American economy (Since the 70s) and anything that addresses these now will enforce our stability in the long term. Recessions shrink the gap between rich and poor, and eventually reduce debt as repayment catches up with new issuances. Housing, energy (notice the $1+ drop in gas?) and financial costs are on their way down because large business have to take a hiatus from the reckless growth they’ve been enjoying over the past 13 years or so. So the best course of action for most of us is to lay low more a coupe of months, save money, then start investing when prices become affordable.

So stay calm, and tell others to do the same. Think in 5 year increments when it comes to finances and most of all DON’T PANIC!