1000 Flowers Bloom: The shrinking economy

So the NY Times says that World Bank says that the Global Economy will shrink in '09. realized reading it that it's all a matter of perspective about how good or bad this is.

It seems to me that the reality is that we OVER produced and OVER consumed in previous years, not just a credit bubble but an everything bubble. We're now just getting back to reality with both our production and consumption.

So yes, maybe the amount that we're producing and consuming has gone down. The question I have is, what is the right amount of production and consumption that can be sustained longterm?

The pain that is being felt right now in my opinion is being driven by people not knowing what the reality of production and consumption is. A bit of a vicious cycle, you don't know how much to consume, because you don't know how much of what you produce will be consumed. This is what happens when markets breakdown.

In my opinion the government actions like bank bailouts, stimulus package and budget are trying to stimulate demand to get people consuming again. They are trying to encourage the production/consumption cycle. Doing this could be exactly the wrong answer.

I tend to think that the right answer is to create enormous transparency about what the situation truly is so that people can have a firm basis from which to make good decisions about consumption and production.

Let's start with all these bank bailouts and their toxic assets. Let's remove opacity from the system by aggressively pricing the assets and letting things (like banks) fall out how they may. The uncertainty of not knowing if a bank is or isn't going to make it because of these assets is causing everyone to freeze up. Create transparency here so people can move on.

The government actions of distorting true demand by artificially "stimulating" it and not reducing uncertainty by propping up failing banks is prolonging the problem we will have, not fixing it.

The key economic insight of transparency and free markets works. We just need the courage to let that happen.