some simple thoughts

  1. 1,544 Posts.
    Cycles of boom and bust
    The moment of truth is approaching
    Doug Casey
    International Speculator
    December 31, 2002

    Our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustments of its own. --Joseph Schumpeter

    The physical world is unlikely to be changed by the Greater Depression, but the way people relate to the world will change a great deal.

    A real estate collapse doesn't mean that buildings will tumble. But their prices will and their owners may change. A corporation's bankruptcy doesn't mean that the factories or technology it owned will vanish; they will become the property of a different corporation. A government default on its bonds doesn't mean the country (which is not at all the same thing as the government) is bankrupt. It just means that those who held the bonds are poorer and those who otherwise would have been taxed to pay the bonds are richer.

    In other words, all the real wealth will still be there, but its ownership will change. And some commodities will become more (or less) valuable relative to other commodities.

    The people who wind up wealthy as the Greater Depression unfolds will, predictably, be those who understand what's going on. A grasp of the business cycle is essential to that understanding.

    The business cycle is the phenomenon of boom and bust caused by inflation. It has been labeled as one of capitalism's "internal contradictions" since the time of Karl Marx, but it is in fact the work of government. In a pure laissez faire economy, the business cycle would not exist because there could be no politically driven inflation. The government doesn't distribute the money it borrowed equally, or even randomly.

    Its beneficiaries receive federal grants, loans and purchase orders. They can spend dollars at close to their old value, before the money starts filtering down through society, raising prices. They are the groups close to the government: Big Business, Big Labor and the establishment in general. They differ on details of personality and policy, but ardently support the system as it is, with money, rhetoric and influence. Since politics is the driving mechanism of this process, and considering that the US groups in control of the political process have a vested interest in the status quo, it is problematical to look to politics for change.

    Betting on inflation has been the winning strategy since the bottom of the last depression, but a financial accident could change all that overnight. The inflationists will almost certainly be right in the long run, but they may get wiped out in the short run. In any event, the moment of truth is approaching, and there likely will be a titanic struggle between the forces of inflation and the forces of deflation. Each will probably win, but in different areas of the economy, as a result, we're likely to see all kinds of prices going up and down like an elevator with a lunatic at the controls. It will not be a mellow experience.

    You'll find a complete list of my current recommendations in my monthly newsletter: International Speculator

    Doug Casey
    December 31, 2002

    Disclaimer: I'm not endorsing the "greater Depression" hypothesis. It was the simplicity of the anal which attracted me.
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