Why the recession is not gonna be over anytime soon

[Avinash_Tyagi]

HappySqurriel said:

Avinash_Tyagi said:

NJ5 said:

Avinash_Tyagi said:
While I agree with him that the recession isn't over and probably wont be for another few moths to half a year, his outlook is a little too pessimistic, his concern is entirely focused on the consumer aspect of the issue, but he forgets that the great depression wasn't solved by letting all of the bad debt work itself out and consumer spending coming back. No in fact it wasn't until the government shouldered massive debt for its time as a percentage of GDP and began a massive public works project (helping to crush the Axis powers), that it was able to come out of the Depression. Letting the banks fail at the early stages of the Depression was one of the reasons it lasted so long because it caused even greater retractions in consumption and investment.

Now while the truth is that he's right that we will have to work out this debt at some point, doing it now will not recover the economy, but rather send it into a downward spiral. GDP is the sum of Consumption, Investment, Government expenditures, and Net Exports, so since consumption and investment are down, government spending has to step up to cover the gap.

Over indebted consumers and the consequence to banks was the reason the recession started, so there's a reason for people to focus on those aspects.

I don't think the Great Depression ended due to higher government debt. In fact the public works projects were seen as failures, and the Keynesians said the government wasn't spending enough.

Look at Japan and Sweden. Their banking crises only ended when the government forced an audit of the banks and let the insolvent ones fail. Shifting debt around and hiding it has never worked so far...

 

Actually it did, WW2 was a public works project, and it sent the government into massive debt for the time to fund it, it put millions of unemployed to work, the problem with the New Deal was it wasn't big enough, WW2 was big enough.

There are several important distinctions between the impact World War 2 had on the economy and any stimulus that Obama can produce will have:

1) World War 2 was heavily financed through war-bonds while Obama's stimulus is financed through monetizing debt

2) World War 2 destroyed a large portion of the industry of developed nations and the largest and most advanced industrial nation in the world was the United States which gained the lion's share of the money from Europe's rebuilding.

3) World War 2 ensured that efficient companies were given money to produce a skilled labour force in order to develop advanced technology (which became the basis of the US' economy for the next 50 years); Obama's stimulus is given to corrupt and inefficient companies to pay back political favours from organized labour and the financial sector.

There are also distinctions between this recession and the Great Depression, this recession has much less unemployment, the financial industry isn't in as much chaos, industrial production isn't as far down, basically recovery is going to be much easier in this recession than in the Great Depression, also that advanced technology, was on the basis of government research and government contracts into new technologies.  So yeah there are differences, there are differences on both sides of the coin, but it still doesn't change the point that its not a working out of the debt that is going to recover the economy, it'll be government expenditures.