Recent news of growth in the Gross Domestic product, and the appearance of home price stabilization have led many to proclaim that the economy has entered into the greatly desired ‘recovery’ that many in the government and news media are fancifully searching for. This appraisal of the current economic situation is based on past experience with brief and shallow recessions that were immediately followed by a sharp recovery and expansion. However, there is a fundamental difference between those events and the current situation.

The fundamentals of a market economy are based on the aggregation of many people making independent decisions. For example, the housing market relies heavily on people buying and selling homes for liquidity… but this buying and selling can only take place if there are people that can legitimately afford to pay their mortgage. The unique aspect of this recession is that it was precipitated by a massive influx of people purchasing homes who could NOT legitimately afford to pay for them. Thus, there is a tremendous inventory of homes for sale, and a desperate shortage of people who can afford to pay for their mortgage. Because of this, it is not reasonable to assume that any real housing recovery will occur until there is an increase in the number of people who can afford to pay their mortgage.

Similarly, there can be no real economic recovery until there is an increase in the amount of people who can afford to pay for their lifestyle. Put another way, more people must produce enough to pay for what they consume. Currently, a large amount of spending is being financed with private borrowing, government borrowing, or government subsidy. None of these represents anything remotely approaching an improvement in market fundamentals. It is simply borrowing from future production to try and create the appearance of recovery.

In the end, there will be no easy way out of this recession. Most recessions occur because of a misalignment in market prices that cause a disruption in output. The current situation was caused by a misalignment in basic economic fundamentals. Furthermore, the government is actively working to prevent these fundamental from realigning, because of the short-term fallout from economic adjustment.

No Shortcut Home

It has already been established that the root cause of our current economic situation is a misalignment of market fundamentals and a shortage of people who produce enough to pay for what they consume. In order to improve these fundamentals, three things must happen:

1. Market prices for assets such as real estate must be allowed to fall sufficient low so that they attract investors.

2. The top producers must be incentivized to create more opportunities by removing regulatory barriers and lowering taxes.

3. People whose productive capacity is sitting idle must be incentivized to go out and produce by finding employment.

The unfortunate truth is that current government policy is oriented in the exact opposite direction of the things that must happen for a fundamental recovery. By expanding entitlements and perpetually extending unemployment benefits, the government is creating a culture of dependence by conditioning a permanent ‘underclass’ of the population who relies on subsidies for their existence.

It is certainly true that initiating a market recovery would be painful. It will involve many people experiencing uncertainty about their financial situation and settling for much lower compensation than they have become accustomed to receiving. It will also result in a sharp reduction in the standard of living for the people who have been living beyond their ability to produce.

However, in the long-run it will return the nation to a sustainable growth trajectory that is built on market fundamentals, instead of government subsidy and borrowing. If this culture of debt and dependence continues, it will eventually result in massive inflation as the government turns to printing money as a last resort for financing its entitlement promises. If this occurs, it will have the effect of permanently impoverishing the dependent class by slashing the real value of their entitlement payments and leaving them without any of the market skills that are necessary to create real output or build real wealth.

For people who are looking to escape this trap, it is critical to avoid the culture of dependence, develop the skills necessary create real value in a global marketplace, and invest in opportunities that create real wealth and place them in control of real assets. This is what will separate the productive wealth owners from the dependent consumption class.

Source by Doug Utberg

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