Arguing with a Friend over the "Recovery"

After reading Crash Proof: How to Profit from the Coming Economic Collapse (I began it Monday morning and finished Thursday evening) I was well prepared to answer a friend's objections to my assertion that there will be a "Greater Depression."

Honestly, my arguments come straight out of Crash Proof.

The argument all started when I posted a link to an article from LewRockwell.com on my Facebook page. The article advocated that the second Great Depression is on the way and suggested 20 items that will be needed to survive. My comment over the link was this:

Preparedness is the best way to weather the
coming economic storm...believe me the worst has yet to come...it
simply hasn't happened yet...all our politicians have done is simply
push off the financial day of reckoning...in doing so we now have more
to reckon with...(think of it as pushing off a student loan to a later date...the interest accrues and the total you have to pay back is more.)

And I think that was enough to get the ball rolling.

My friend and I have a somewhat interesting history. We both attended the same university (he is a 2009 graduate; I am a 2010 graduate). In the spring of 2008, he actually was the one to convince me to join the Barack Obama campaign at our school (before then I had no political affiliation; although I leaned Democrat). I did for a while, even up to the 2008-2009 school year, but then I left (I actually joined College Republicans afterward, but I left that too, only to go back a year later); he remained a dedicated member of the campaign and Young Democrats. And like most people who argue from different positions, we hold profound disagreements in maybe just about everything (except religion).

Here is the argument thread:

HIM: "We're headed for a great recovery. Lets not forget that over the last six months our economy has grown grew by about 4.5%, a very aggressive growth rate, and one of the highest clips in the western world over the same time period. The American consumer finally feels confident enough to spend again, and so do businesses. Soon they'll begin accelerated hiring. We've almost turned the corner. Hardly proof my friend of an economic apocalypse."

ME: "So we are working with the same statistics, but we are obviously interpreting things differently. If I understand you correctly then consumption, consumer confidence and hiring is evidence for economic recovery. If that is so that is where we depart ways. I don't understand your 4.5% statistic -- is this production? consumption? something else?"

HIM: "economic productivity....and hiring, productivity, consumption and consumer confidence are evidence of an economic recovery, indeed they are the hallmarks of one. A simple truth is becoming clear Chris: The economic relief package passed by the Congress is working. The Obama Admin. saved us from economic abyss. I hasten to add that if we didn't ... See Morepass the relief packages more Americans would be unemployed, more houses would have been forclosed, more businesses would have closed, and American influence would have further waned around the world. Thank God we acted"

ME: "I noticed you left out production. An increase in productivity means employers are doing more with less workers, which is good on one hand, but on the other it also means that payrolls are still tight and employers can't afford to put people back on staff. Productivity deals with efficiency, yet production deals with the quantity of goods being ... See Moremade. My point is that we need an increase in production before any serious recovery really happens. When more money is injected into the system via relief packages, yes on the one hand people can pay for goods, keep their homes, keep businesses going, but that comes at a price. The increase in the supply of money into the system without increase of goods and services will lead to price inflation. In other words, you just socialized the pain to everyone else because the U.S. Dollar loses purchasing power.

Second, we have a massive trade deficit and we are in debt up to the moon. Consumption would only be good if we were using our own money to buy things. But we are not; we borrow billions of dollars a day from China. The consumption ends when China stops playing our game. I don't believe China will finance our consumption indefinitely.

Third, we need to go back to savings and under-consumption to move forward. Until people learn how to save again to produce goods we will never move forward.

I'll wager (nothing) on this, if the Obama administration (or any future administration) has to continue to pass relief packages then I think that proves my points both that the economy is not recovering and the relief efforts only delayed the necessary economic depression. Why necessary? Because absent the bailouts all those bad assets would have been liquidated and better company would have picked up the slack. But instead by bailing them out a company with a bad balance gets off the hook, as if they had a change of heart or quickly change their bad practices. They were failing for a reason. Let em' fail."

HIM: A few problems with you thesis,

One, "now hiring" signs are being posted in businesses and shops across America. Last month we added 300,000 jobs to our economy. The month before we added an addtional 160,000. Thats almost a half of million jobs added...in sixity days!

Second, most economic forecasters believe that the odds of a double dip and a spike in inflation are quite low over the next four quarters.

Third, the notion that China would dump a signficant amount of American debt in the near future is laughable. Clearly it would dramatically alter US Chinese relations. Moreover, I don't see the wisdom in undermining your biggest trading partner. But most importantly dumping our debt would depress the Chinese economy. Its a lose-lose, which is means its non starter.

Our economy is growing precisely because of the bold actions of this adminstration. We need economic reform, we need to cut spending, reduce the size of government and increase revenue, perhaps with a VAT tax of some kind, or a modest income tax increase. For the first time in almost a decade we're on the right road again, and we can't afford to turn around.

[END]

As you can see I left the arguments intact, grammatical and spelling mistakes included. I let my friend have the last go around, but it was really enjoyable to hear the other side of the argument, and get someone to grapple with my economic pessimism. While I agree that we need to cut spending and reduce the size of government, I definitely disagree with the idea that a VAT tax of any kind or a modest income tax is the solution to our economic ills. My main concern with that thesis is that people need to save more, not save less by giving more money to the government.

As for his appeal to "most economic forecasters" I find this to be the least robust response; and I think other Austrian economists would too. Our belief, if I have been amongst these group of thinkers long enough to speak as an authority, is that mainstream thought, for the most part, has gotten the whole economy wrong; their prognoses are incorrect, and so are their prescriptions.

Finally, I disagree with his view on China. Lose-lose situation it may be for China--on the one hand, they can dump our debt and depress their economy; or they can keep our debt and hold devaluing U.S. dollars--but in the long run China will be better off by dumping our debt. In fact, the purchasing power of the Yen will increase dramatically, while the U.S. dollar's purchasing power will plummet. I didn't address everything in this recap, but I think I addressed enough.

To my friend, I suggest he picks up Crash Proof 2.0 (since it is updated and more recent) or become an avid reader of the writings of the Mises Institute, Atlas Sound Money Project, Peter Schiff's Economic and Market Commentary, Campaign for Liberty, among other articles on LewRockwell.com.

Any articles that Peter Schiff wrote that were featured on Lew Rocwell's blog would be good starters.

Also, watching this lecture that I personally attended and partially recorded would be a quick primer on Austrian Economic thought, and thus would be helpful to understanding my position.



The rest of the playlist can be seen here: Peter Schiff in Philadelphia

[Update on 5-20-10]
Peter Schiff argues that the fundamentals of the economy are still unstable and that the bigger financial crisis has yet to come; he also argues that the perceived recovery is a sham and the new financial regulatory reform is merely going to exacerbate the problems that are already there.