Anatomy Of A Depression

excerpt from It’s a Depression, Not a Recession

In a recession, the basic plan or formula for the economy is still valid. The economy just needs a little time…and maybe a little monetary boost…before it continues growing. Typically, inventories are sold down…so a new burst of production can begin.

But in a depression, the problems are structural.

One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can’t pay if off – because you don’t have enough income – you have to declare bankruptcy.

A depression is when a whole economy declares bankruptcy…or should. Because it can’t pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on.

Imagine, for example, a guy who built a nationwide chain of stores just to sell iPods to teenagers. The business may have been a great success – for a while. And he took out huge loans so he could expand…and take advantage of the demand. But then comes a depression. He says to himself: ‘I’ll just get some more financing…and wait it out.’ But who’s going to lend to him? By the time the kids begin buying again, iPods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.

A depression is when the whole economy changes its business plan, in other words. And that takes time…and creative destruction.

How much time? Well, in the United States alone there is about $6 trillion too much private debt…$1 trillion too much output capacity…and millions of “excess” workers. How long will it take to retrain, retool, and re-absorb these excesses?

We don’t know. The last depression took about 20 years…and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led economy…to a post-WWII consumer-led economy.

In Japan itself, its post-WWII capital investment-led boom hit a wall of creative destruction in 1990. Now, 19 years have gone by…and it is still adjusting to the new world economy.

All we know so far is that this depression has wiped out more than $30 trillion of dollars’ worth of investors’ capital. We suspect it will wipe out another $30 trillion worth before its creative destruction is over.

Our guess is that it will also destroy the U.S. consumer-economy model…and the dollar-based world monetary system.........

........But first, we turn to the news. We’ll see what a depression looks like – just from reading the headlines.

The Dow fell 121 points yesterday. That leaves only about 4,000 or 5,000 more to go…before the index reaches its depression bottom between 3,000 and 5,000. That could take a long time…depressions always take time. It might not happen before 2010…or even before 2020.