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Minyan Mailbag: The Natural Cycle to Capitalism

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A recession is a healthy thing.

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Prof Succo-

Your post got me a bit more scared and disturbed than I already am. The systems (financial, political, and socioeconomic) are eroding (see Henry Liu's article this AM) and the clock is ticking. Forget about stocks and the daily gamesmanship and charts etc., when the water goes through the cracks and into the basement, what happens then???

Your Faithful Minyan Steve

MS,

We have a significant correction in asset prices.

A recession is a healthy thing. In an expansion, excess capital is built up, non-productive capital. Think of all the strip-malls opened that shouldn't be there (Couldn't we drive another two minutes to pick up that item?) and only exist because of an expanding economy. This adds costs to society that shouldn't be there.

A recession wipes non-productive capital out and starts the game fresh. It is a healthy thing. This is a natural cycle to capitalism.

But through political will, the Fed and the government have expanded their activities to wipe out these cycles by printing money. But they haven't been wiped out, just delayed.

And compressed. The next recession is going to turn into a major credit contraction equal to the degree of credit expansion that has been allowed to go unchecked.

So when it does happen, it will wipe out the egregious amount of un-productive capital that exists. One problem, though, is that now the real economy is inextricable from stock and real-estate prices.

But when it is all said and done, perhaps we will realize what it means to give the government the power we have given them, to debase the currency (which they don't really have the right to do, we just let them). This will set the stage for America to rise again.

-Succo

Prof Succo-

Thank you, and I agree more than can be expressed in words. If we would have had a real recession in 1998 or 2000, perhaps the pain would have been less than what is fated now to probably begin shortly. In any case, your points are very well taken.

I am not a big "conspiracy" guy but is it likely that the fed, etc., are playing their "dirty games" in order to assure that Greenspan goes out on a "good" (as ridiculous as that sounds, I know...) note, so they are "pumping" to just make sure???

Minyan Steve

No positions in stocks mentioned.

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