2008 In Review - Part I

You don't need to be selective in your reading material, or television program, to get the sentiment over our current economic downturn. Although it's too late to prevent the downturn that is taking place, the need for instant gratification has blinded most to the fact that a recession is the most appropriate outcome given our debt-driven economy.

In print you'll find the term recession, and perhaps even a definition of a recession, which constitutes at least two consecutive quarters during which the economy contracts. But what is a recession really? Simply put, a recession is people and businesses coming to their senses.

The participants within the economy, businesses and consumers, curtail their spending. If there's more saving among consumers, there's less money flowing to businesses. Consequently, lack of income may cause businesses to layoff workers, which will then curtail spending on other goods and services even more. The government sees this as a vicious spiral and provides bailouts to companies so that they will continue to employ workers, who will then continue to spend money on products, and thus keep other businesses operating and employing workers.

The fallacy is in the assumption that such a recessionary environment would cause an endless spiral of contraction. In reality, the downturn our economy is experiencing is a correction of misappropriated resources. The businesses and jobs that the government attempts to support should not have existed in the first place. For a poignant example look no further than home builders and car manufacturers.

The home-building bubble caused an artificial demand in construction, which resulted in more home-building companies and construction jobs. When the bubble burst, those companies could no longer employ all of the workers because there was no longer a market for construction. Likewise, companies like GM, which were losing money during times of record breaking sales, are pitching the government with a plea to "support the workforce", a workforce that has been inflated by the demand for GM cars – a demand that no longer exists.

For example, one hundred men, using one hundred shovels and pick axes, are digging for coal. Management orders 2 tractors and subsequently fires 90 people. The government comes back to the company and says, "What are you doing, think about all of the people that are now unemployed." Management responded, "If employment is the objective of this company, then perhaps we should hire ten thousand people and give them spoons".

It makes no sense to invest in workers or businesses when the goods of their production are worth less than the initial investment.

Market participants innately correct disinvestments by removing money from unproductive activities until an opportunity to invest in something productive comes to pass. As a result, spending contracts, and in the economy it's reflected as a recession - companies fire people they can't afford, GM doesn't sell cars no one buys, and I don't go out and get a subprime mortgage. While painful, that's a good thing, and is a responsible use of resources.

The word 'recession' has gotten a bad rap, and I blame it on the fact that few people have a clue as to what a recession really means. Recessions by no means are pleasant, but they are necessary. Think about a time when you were sick and had a bad fever. Well, the fever is certainly an unpleasant experience, but it's necessary in order to combat sickness in order to restore your health. Unfortunately, our government's 'solution' is to prescribe the very same thing that caused the sickness in the first place.

Part II

Part III

Part IV