Reprise: Why This is Going To Be a Long Recession

I wrote this post in January 2009, just after Obama's inauguration.  I think it holds up pretty well.

The notion that a 'stimulus' is going to solve our economic crisis is frankly ludicrous, in my opinion. I know that there is little else that our government can do in the short term, and so this is what they feel they have to resort to. But this crisis was a long, long time in coming, and because of that, it is not going to go away anytime soon. That is a hard truth that President Obama has hinted at but hasn't come right out and said, because he simply can't. It is just too unpalatable to a very spoiled nation who don't want to admit that they've blown it. Let me explain.

As a nation, we are like a family that has been steadily losing ground economically while at the same time borrowing more and more money. Because we can keep on buying the things we want and going on vacations with all that magic borrowed money that someone mysteriously keeps on lending us, it just seems great. But ultimately this is a losing proposition, because sooner or later, this family is going to hit the wall and go bankrupt. That is what is happening to us. We are effectively bankrupt.

We thought we were bad off in the 30s, and we were. But on the other hand, we were still tremendously wealthy in so many ways. We were the largest industrial nation in the world, with vast resources of oil, so that we were the largest exporters of that basic energy source. And many unemployed people were able to live on farms and grow their own food and at least survive.

After World War II, we were effectively the only industrial nation, exporting manufacturing goods all over the world virtually without competition. As a result of this industrial monopoly, and of the rise of labor unions and other laws that tended to equalize incomes and wealth across all classes, we grew the largest middle class ever known and truly did become the most affluent society ever. It's no wonder, given the circumstances, and not really a cause for pride in ourselves.

But over the last 40 years, virtually every one of these advantages has gradually disappeared. We have gone from being the greatest manufacturing power to a deindustrialized weakling that has very little that the rest of the world wants, with exceptions like movies, music, medical equipment and weapons. (Oh, and I'm proud to say that my brother stills makes locomotives for G.E. in Pennsylvania.) We import most of our oil, sending billions of dollars overseas. Our manufacturers have one by one closed down their factories and moved them overseas. We import so much more than we export. What do you buy in a month' time that is actually made in the United States? Even our phone calls for service are now routed through India. To make matters worse, the national wealth and income have become redistributed, with the rich getting richer and many in the middle class falling into the lower class or even poverty. The middle class, with its securities, is disappearing.

To compensate for all this, we have been borrowing money from foreign lenders by the trillions of dollars, and piling up unfunded liabilities that will never be paid. Our financial industry invented all kinds of special financial instruments to make their fortunes that are now seen to be virtually worthless. We've been gorging on credit card debt. A huge housing bubble which should never have been allowed is now deflating, taking our home values with it and threatening foreclosure to millions of families. And so on. In other words, much of the prosperity of the last three decades has been largely an illusion, based on borrowed money or promises that can't be fulfilled.

To make matters worse, the world's oil supply may very well be peaking and in decline, which means that the energy source that fuels our modern industrial lifestyle is going to get very expensive, to the point where that lifestyle will have to be severely curtailed. That is what happened in 2008, until the financial crisis and recession hit, bringing down the price of oil (temporarily).

It is very foolish to think that we're going to be able to turn all of this around with a 'stimulus' package, as if all we need for our economic re(de)pression is the equivalent of a gigantic shot of caffeine from Starbucks. The underlying problems are so deep and profound, that we are basically just prolonging and deepening the problem. Aren't we just continuing to borrow money to pay the bills? Don't we at some point have to start actually earning the money to pay our bills? What happens when the lenders stop lending?

If countries like Germany and Japan, who were flattened by our war machine during World War II, can rebuild and become industrial giants again, then perhaps we can too. But it's certainly going to take a facing up to the reality of our situation. And I'm quite sure that we're not there yet. I'm quite sure that most people have little sense of what has been happening. And I'm not sure anyone knows what to do. Surely the economics profession, who didn't have a clue what was coming down in 2008, are themselves intellectually bankrupt and blind guides.

So, while I'd love to believe that Obama knows the solution to this financial and economic crisis, count me as an economic pessimist.