Defining a Path to Economic Recovery

By Todd Harrison  JUN 02, 2010 7:45 AM

The world arrives at a historic crossroads.

 


“The answer my friend is blowin’ in the wind; the answer is blowin’ in the wind.” --Bob Dylan

A few weeks ago, the European Union unleashed a trillion dollar “solution” to the burgeoning global debt crisis. The resulting volatility has left many in wide-eyed wonderment.

While the magnitude of the proposed bailout is staggering, the pattern of behavior should be familiar for it's consistent with the tactics we've come to expect. The question, of course, is how many bullets are left in government guns before free-market forces take back the tape. (See: Shock & Awe)

The War on Capitalism started long ago. It began with covert ops as the Working Group for Financial Markets operated behind the scenes, migrated to Martial Law when short sales in the financials were banned in 2008, and escalated to the current conflict when global central banks took aim at speculators.

The ramifications are profound given the untenable debt and risk gone awry in our interwoven finance-based global economy. Given economic hardship is traditionally a precursor to geopolitical strife, the battle between bulls and bears may be the least of our concerns.

Sun Tzu once said, "In making tactical dispositions, the highest pitch you can attain is to conceal them." That, in my view, has been our stateside economic strategy for the last ten years; buy time, with hopes that a legitimate recovery takes root. (See: Anatomy of a Recession)

As we edged through the last decade, however, cumulative imbalances set the stage for the current rage in the world today. (See: A Decade of Decadence)

What was once a financial debate evolved into an economic reality that migrated into the social sphere. The issues are no longer masked by complicated vernacular or fancy financial algorithms. They’re front and center for mainstream America and graduates who can't get a job, homeowners in foreclosure, and the one-in-six people currently under-employed. (See: The Short Sale of American Icons)

While we often muse that the destination we arrive at pales in comparison to the path we take to get there, we’re witnessing a historic juncture that includes seismic shifts in social mood, monumental movements in free market capitalism and a remarkable transference of the balance of powers.

Two Roads, One Redemption

There are two alternative paths: the one we’ve been on and the one we’ll find ourselves on, whether we like it or not.

You know the drill by now. There’s so much debt at every level -- consumer, corporate, and government -- that each time the bill comes due, we push it to the future or monetize it with more currency and additional credit creation.

That “worked” for a while, masking our malaise through the lower dollar and skewing our true economic condition with the spending habits of a slimming margin of society.

While this has been the preferred path of policymakers, the enormity of the economic condition is overwhelming the synthetic structure. This could conceivably continue although it comes at a cost that includes moral hazard, social unrest, protectionism, and geopolitical friction, all of which are cumulative.

The other road is less traveled and for good reason; it’s not particularly pleasant and few will benefit, at least initially. It’s a discussion we’ve had a few times through the years and delved a bit deeper into last week. (See: Return of the Phantom of Deflation)

This bitter pill is swallowed as follows: we take the free market medicine of debt destruction and asset class deflation and eventually arrive at an outside-in globalization that sets the stage for a sustainable global recovery.

Put another way, if we were allowed to enter recession after the tech bubble burst -- remember, the other side of the business cycle was considered anathema and we were deemed unpatriotic if we weren’t bullish -- we would already be on the road to recovery. Instead, we messed with Mother Nature and now she wants to -- and ultimately will -- exact her revenge.

In order to get through this, we needed to go through this and perhaps that’s the silver lining in the storm clouds on the horizon. Those who proactively prepare, preserve capital and remain calm will be in a position to prosper once the dust settles.

I will leave you with another quote for Sun Tzu, for it's apt. "The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the face that we have made our position unassailable."

Those are wise words as they pertain to financial empowerment. Respect the unexpected, balance your approach, remove emotion and understand that this too shall pass for once it does, there will be massive opportunities for those who persevere.

May peace be with you.

R.P.

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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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