The Great Recession Explained . . . In Widgets

The United States (and the world) is in an economic depression. It is relatively less-bad than it was a couple of years ago, so "they" have declared the Great Recession is over. "They" will likely call the coming double-dip a separate phenomenon, but it is part of the same depression.

Here's why, explained in terms of a theoretical widget manufacturer:

Widgets Galore, Inc. makes widgets. In 2007 they had 100 employees who were proudly able to make 100 widgets a day and sell every one. Thirty of the widgets they sold every day was bought on credit. Then the buyers figured out they had better stop charging widgets to the credit card because they couldn't make their house payments and buy widgets both. So the crash of 2008/2009. Widgets Galore managed to stay in business by cutting out 23 widget makers. There are 23 widget making machines now standing idle. Prices on the 77 widgets they still sell every day are down by 25%.

Widgets Galore is not planning on buying any more widget machines. They got a stimulus grant to buy widget making supplies, and they stocked up last year. Now they are not planning to buy widget making supplies, either. They have no need to buy machine parts either, because they have so many machines out of production to rob parts from as needed. The owner is considering whether he can afford the new taxes when the Bush tax cuts expire, and he's probably going to have to either drop three more employees or drop health care payment insurance for all the employees, thanks to obamacare. He'd like to hire an employee or two back, but it looks like that would kill his profit margin altogether.

Widgets Galore, times 30 million, is the U.S. economy right now. Manufacturing is down, and a temporary inventory-rebuilding cycle has just ended. Nobody is hiring, nobody needs to buy anything for their business, and their customers aren't buying anyhow. The economy we had was based on credit which is now unavailable, and demand which has collapsed because people realized they don't need any more stuff. There is several YEARS worth of over-capacity in every industry except possibly energy production. We are in a LONG down cycle right now.

But don't feel bad: we've only lost one decade of productivity so far. Japan is working on THREE Decades of lost productivity. They did and are doing what we are doing, to get out of their depression. But I'm sure it will work when we do it because it's different when we do it!