Recession

The economists and politicians around the world are scared because the No1 monster, the recession (GDP decrease) is coming in 2009. It gained the No1 monster status by causing huge unemployment, decrease of state incomes and decrease of sells (and profit and manager benefits) for companies.

Several business gurus and politicians are fabricating plans against it, asking for your money. Don't give them, it will make no good. Recession is inevitable. I try to explain why.

To understand it, you don't have to know anything about CDS market, shorting, any kind of derivatives, stocks or even the existence of money itself. To understand it, you only need to understand a very simplest of economies:

X hunts for meat, Y creates pottery. They need the product that the other one product so they barter. So far so good, the GDP is 1 meat + 1 pottery (products consumed by the producer are not counted into GDP).

Let's say that Z has an idea of growing corn. It needs seed, it needs workforce (Z must eat and have no time to hunt himself, must work on the fields) and generate product only after a year. In this case X can choose to give loan to Z by giving him meat now and accepting only a promise in return that Z will give him corn at the end of the year. In this case the GDP is 2 meat + 1 pottery + 1 corn.

Loan is good, since it allowed Z to create corn and to buy meat. Without loan the GDP would be just 1 meat + 1 pottery. Without loan the only way to increase GDP were to produce something else than you're good at, creating deposits and make your investment from that deposit. For example Z could create 1 pottery too, selling only half for meat (being frugal on eating), so in 2 years he would have a pottery deposit, he could trade that pottery for meat while he is working on the fields.

Let's say that instead of Z we have L, the loser guy who says that he will grow corn at the end of the year but he won't. X believes him, give him loan, but L could not return it. The GDP is 2 meat + pottery. 1 meat's value was lost to X, but GDP (Gross Domestic Product) does not care about personal losses and gains, and the 2 meats were created and sold!

Next year L promises again that he will grow corn. Of course X will not believe him, will not give him meat in advance and in lack of buyers, he will not hunt it. So the GDP will fall back to 1 meat + 1 pottery.

This is exactly what happened now. The sub-prime loaners (loser guys) bought houses and other stuff from loans (promised that they will repay it). The houses and stuff were created, therefore counted into last year's GDP. Next year no one will give the sub-prime guys loans so they will be able to buy nothing, so these things cannot be produced, therefor their value will be missed from next year's GDP.

The "crisis" of today is nothing more than the cries of X because he just realized that he will never get anything for the meat he gave to L. The governmental intervention is nothing more than distributing this loss among the people, forcing Y to give some free pottery to X in order to decrease his loss (protecting bank accounts from vanishing using taxpayer money).

Nothing can make the people believe in the sub-prime loaners again. They will get no new loans, so they won't be able to consume (so much as they did before), so the production of those items must decrease. This recession is inevitable and will last until new buyers come, with money. They are maybe former sub-prime loaners, who, after losing their home, finally go to work to climb back to the lower-middle class. They are maybe people in foreign countries who make enough money to buy western goods.

Today everyone says that the "problem is that the banks don't trust in each other, don't give each other loans". It is not a problem. It is inevitable since the banks are right about not trusting each other. They all gave sub-prime loans and they all bought poisoned derivatives. Until all these loans are repaid by someone (most probably by the taxpayers) and the poisoned derivatives are not solved somehow (most probably by someone accept the loss, go bankrupt or ask for governmental help) no one shall trust in no one.

The problem is the sub-prime loan itself, the fact that loser guy got loan what he never had a chance to repay.

The gurus and politicians are theoretically right about the freezing of good loans. The banks don't dare to give loans even to good investments (X doesn't dare to give meat of Z in advance since he burned himself with L). This event causes a further GDP loss as good investments can happen only on deposit base instead of loan base. So they are theoretically right that the markets should be de-frozen. Practically they are the very same guys who gave the sub-prime loans, traded poisoned derivatives and picked up billions of dollars of premium for the crisis year, despite the government just saved their bank from being bankrupt.

So my advice: until these guys are removed from every influential positions, don't give a single cent for "market saving" actions. Vote no for every such attempt and all the politicians who support them. Don't throw your hard earned money into a bottomless bag!

Some fun to the end of this not-so-optimistic view: How do the brokers call the sub-prime people? "No Income, No Job or Assets". What's so funny in this? Read the capital letters :-)