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Monday, March 2, 2009

A Small Business Perspective On The Difference Between Recession And Depression

In a bit of a diversion from our normal faire here at Small Business Resources Cafe .......

"A recession is when the middle class has no money. A depression is when the rich have no money." - Scott Wolpow

OK ... that's enough humor. This economic situation is not a laughing matter. Especially for small business owners and start-ups (if any are brave enough to attempt a start-up right now).

Anyone listen to President Obama's address to Congress recently? Or any of his frequent "campaigning while in office" speeches (you won already ... now stop talking and start LEADING). Sorry .... but the guy just doesn't get it.

In a depression prices cannot be sustained by the market. So there is a tendency for prices to fall rather than rise. [Ahhh .... maybe the oil companies should reread that last part. Seen gas prices lately?]

* Because incomes are insecure people restrain their buying.
* Because sales are difficult firms restrain employment.
* Because the outlook is uncertain investment is restrained.

This is a circle of events that feeds on itself. It will only reverse when people have confidence in the future.

That's where good political leadership and strong business leadership becomes essential.

Throwing any amount of money at the problem CANNOT fix it. It's not about the money. At heart, the problem we have is a moral one. How should humans live on a finite planet.

We thought we had a wonderful idea about that. We should invest in industry and improve production and when we were very productive we would ALL be RICH.

We now know that long before we all get RICH, we destroy the environment, we become engaged in resource wars, and we destroy the social conditions that make a good life possible. We also know that in a global economy, we can't solve this problem at a national level.

We cannot rebuild a new world economy based on the old model. The result of that would be a short term victory and a long term disaster. Pouring too much money into the economy now can only buy that wrong solution.

We need wise heads. We need to understand that the secret of success is to get the core of what we are doing right.

One could argue that a recession might even be necessary every once in a while to let the economy re-group and adjust to different circumstances. With the introduction of the automobile, the horse-and-carriage industries suffered a recession. When the damage from such adjustment gets so big that the entire economy can't recover from it, (e.g. when too many people were involved in the horse-and carriage industry lose their jobs, can't become automobile workers, and can't buy cars because they have no income anymore) we have a depression: then the automobile industry etc. suffers as well.

Back to the attempt at humor in the begining of this piece ..... explained with a different simile:

"Recession is when the rich guy fires his gardener and makes him drop the rake on the lawn. Depression sets in when the rich guy can't see the rake because the grass grew too high, steps on it and gets hit in the face. Now both are hurting."

The difference between recession and depression is that a recession is short lived, and depression goes on, and on. and on, and sadly that's where we are at.

The real reasons go back to Bretton-Woods, but particularly the decision of the USA to move off the gold standard in 1971. That worked well for the USA. The US Dollar became the default reserve currency of the world. That led directly to the political view in the USA that "deficits don't matter". So successive governments, especially the Republicans have stoked the fire of inflation with deficit spending, that should have led to a decline in the value of US dollars, but because of the reserve currency status that didn't happen. Instead, wonder of wonders, people in foreign currencies ended up paying the USA a premium to use the US dollar in foreign exchange transactions. Effectively the USA let it's financial affairs get out of hand and the rest of the world paid the price. (From the USA's point of view, nice work if you can get it.)

But in economics, the real costs of what people choose to do eventually come home. You now definitely have a depression. So the question is how long will it last?

It will last until the structural problems that caused the depression are fixed. In the USA, the real problem is being avoided by both the Democrats and the Republicans. Business interests fund both parties, and they are entirely focused on how to "save" the business interests of the people who fund them.

Really .... where's the "common sense people" in all this back and forth. On the outside .... not being listened to (at least by those who need to be listening). As usual. Can you say Nancy Pelosi "pet mouse" project"??? Or better yet .... Chris Dodd's and Barney Frank's "give them a house" (chanted in the same cadence as "let them eat cake"). Or Obama's theme song .... "spend more and more now" (sung to the tune of "who let the dogs out").

Who's going to lead us out of all this .... whenever that eventually happens .... is small businesses. All they have to do is give us a chance. If they don't kill us off before hand.

What we really need is a Mike Huckabee "common sense" hammer to hit "them" all upside the head. Or another Joe The Plumber Kodak moment. "Them" being both the political leadership in Washington and the big business stuffed shirts (the guys getting our money .... so where's YOUR bailout).

Here's hoping .... but I won't hold my breath.

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