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One way to look at the current crisis is that a whole lot of long term plans, once thought to be sensible, were abruptly shown to be unworkable. These plans in
by mattchew 18y ago
One way to look at the current crisis is that a whole lot of long term plans, once thought to be sensible, were abruptly shown to be unworkable.
These plans included actual inventories, lines of production, houses and other buildings, and actual people working at actual jobs to support all of these.
Those plans now have to be scrapped. That means inventories wasted, lines of production shut down, and people fired. We cannot just keep building more and more houses as if nothing has changed.
Shutting down production lines and firing people is a real destruction of wealth.
This destruction will have secondary and tertiary effects. We've already seen how the cascade works in the stock market. Over the next year (or more) you will see it in production and employment levels.
> The crash of the financial markets has not reduced the production capacity of any of these goods or services.
It has, because a considerable fraction of that productive capacity was allocated based on false assumptions.
We have to reallocate that productive capacity to new purposes. We don't yet know exactly what capital and labor needs repurposed, or to what new purposes. The way we find that out is by businesses contracting or going bankrupt and people being thrown out of work. Eventually, other businesses will expand, new ones will start up, and people will find new jobs. It will take a while, and in the meantime, it is going to hurt.
- startingup 18y agoTotally agreed! Thanks for that succinct explanation of the real world connection to all this financial destruction. A whole lot of capital and labor needs to be repurposed, and it is going to hurt, even without the political system making things worse. History teaches us that the odds aren't very good on that front- it is not a Republican vs Democrat issue, nor for that matter a US vs Europe issue.
- maxklein 18y agoNah, the effect will be minimal. A house is either being built or it's not being built. The investment in a house that is not built yet is not that much, for the simple reason that there are not THAT many houses being built. This economic correction will have an effect, but it will not be terrible - it only affects very tiny parts of the global trade, and most of what is affected is just U.S based and very local.
- yummyfajitas 18y agoCertainly, the transition from bad to good investments will hurt. I didn't mean to imply that it wouldn't. But what you are describing is a normal recession. The only reason the economy even contracts in a recession is because it takes time for the new projects to ramp up. Once they do, things return to normal. In material terms, we lose some half built houses because no one wants to live in them. I.e., we have more stuff than we need. The depression was much worse. We lost production capacity in a time when people were going hungry. That is, we had less stuff than we needed. Scarcity is far worse than surplus.