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We are not in a cyclical recession. We are in the aftermath of an economic bubble.
Observing the internet bubble I was more than alarmed because ALL economic bubbles take down their host economy when they burst. (Even a mania as comical as the tulip bulb bubble absolutely demolished the Dutch economy.)
The internet bubble was really, really big in both absolute and percentage terms. It has been unwinding for eight years. The bubble was squeezed from stocks into real estate Then when th real estate bubble started to deflate it rushed into commodities. (Oil, gold, food, etc.) These things don't happen overnight.
Every class of asset has had a bubble rip through it leaving people skeptical of the very concept of asset value. Now the only thing people trust is cash, and they are hoarding it accordingly.
When a bubble bursts the money supply contracts dramatically and, more importantly, people lose interest in economic activity. And once prices start deflating cash is the only asset that in increasing in value. There is no incentive to buy anything except staple necessities when you know the price will be lower next week.
So this is not a usual recession.
How bad is it? Consider this: In the last year our economy has received the largest stimulus jolts in history, not once but repeatedly. The price of oil being cut in half is equivalent to every tax cut in memory rolled into one. The Fed has created more money in six months than anyone can ever imagine. The government mailed checks to every taxpayer in the country. We de facto nationalized the mortgage industry and the investment banking industry.
And the effect of all of this has not stopped the slide.
Your car is stuck in the snow. You keep putting sheets of cardboard under the spinning wheels to gain traction but they are just spit out. You can sit there all day feeding sheets of cardboard under the spinning wheels and hope that there will be a cumulative effect of all this cardboard, or you can put something thicker under the wheels.
The stimulus needs to be:
1) unimaginably large, in keeping with the equally unimaginable scale of the problem.
2) Dramatic and different—jarring, cataclysmic, explosive... chose your adjective. It has to be a game changer, not merely palliative. Usually you try to soften the blow while waiting for the business cycle to work through the problem. In this case it is possible that there is no natural rebound to wait for because this is not a cyclical recession.
3) It must fundamentally change consumer behavior. That's why it has to be dramatic—the most striking, attention getting, rules-changing use of government power in our lifetimes. Pumping some money into the system on the edges will not change consumer behavior. Creating jobs directly will not change mass consumer behavior—consider that all the employment talk is about how to keep unemployment under 10%. Unemployment is currently 7.2% and the consumer is already flat-lined. If we are flat-lined at 7.2% then we aren't going to be happy shoppers at 9.2%, even though 9.2% is obviously much better than 12.2%.
4) Inflationary. When you're putting stuff under those wheels spinning on snow the car doesn't usually ease out of the snow. You put stuff under the wheels and rock it and pump the gas and eventually it leaps out of the snow. Then you hit the brakes and regain control. The kind of fundamental change in consumer behavior we need will be inflationary and as long as inflation is not a problem then we are not doing enough. Inflation is the second worst thing in the world... right after deflation.
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