For the second half of 2008 it was fashionable to refer to the current state of economic affairs as a financial crises and there was much debate over whether this is a true recession. Over the past few months it has become increasingly clear that the contraction has spread throughout the entire economy. In other words, this is a true Recession. No amount of guarantees of the stability of the financial system will encourage increased economic activity. This is not simply a crises of confidence.

Now we are finally getting to the root of the problem: fundamental misallocation of capital. The absurdly low interest rates of the mid 2000's initially manifested themselves in rapidly rising home prices, but those home prices create a wealth effect for home owners. As home owners felt more wealthy they increased spending on a broad range of goods. It is clear now that that increase in spending, along with the expectation that it would continue, allowed unsustainable businesses to temporarily remain viable.

We now see these businesses belatedly failing and downsizing. US automakers are on the brink of collapse and likely would have done so years ago if not for the surge in demand for SUVs. Circuit City is finally liquidating though it has played second fiddle for years, sustained only by huge demand for electronics. Media companies from newspapers to music distributors are declaring bankruptcy or downsizing dramatically as the internet draws away their audience.

So why does this make me optimistic? Because the businesses that are failing now have been failing for years. The easy money of the past decade has delayed creative destruction and allowed wasteful businesses to continue wasting financial and intellectual resources. But now all those failures are being washed away. In the short term this recession may get very ugly, but in the long term a huge amount of productive capital will be released and re-allocated to much more efficient uses.

The massive downsizing of Wall St. alone will release a tremendous number of creative people and allow/force them to focus on more valued activities. Wall St. firms hired many of the smartest people in the world into their trading operations; unfortunately, trading is a zero sum game. In order for me to make a good trade someone else must make a bad trade. If any fraction of the physics and applied mathematics PhDs engaged in this high stakes sport now move on to apply their talents in true positive sum markets, the long term result will be a much more innovative future.

Though I have no doubt that the persistent effort by governments to maintain the old will do much harm and delay this outcome, I still look forward to the world that eventually will result from this inevitable shuffling of talent and resources.

It seems that the end game will be for us living in the western cultures a world of oppression. Even more oppression than we already are under.

I dig what you're saying, but it will all depend on what the gov't does. I mean, the Japanese have still not recovered and rejuvenated.

You may be right. However, I expect this will last longer than we hope it will. Businesses are cutting margin's left and right. In particular manufacturers are cutting margins and offering spiffs to retailers in the hopes they can stimulate their business. A specific example is Home Depot and Lowe's (yes, even Ikea);
there is no way retailers or manufacturers can sustain that kind of margin reduction and keep the lights on. Manufacturers for the building industry are shutting down factories left and right and the ones who are still alive are selling their blood for dollars. Retailers are closing branches at a similar rate. Landlords feel the burden and Commercial developers are walking on eggshells.
To your note, I am optimistic that the days of quality over quantity will be back.
The planet and its inhabitants could certainly use a rest from Walmart junk and Wall Street junkies.

I find it hard to be optimistic in any run because, well, I don't know enough to make a realistic evaluation of what will happen. Which tends to lead one towards a more 'pessimistic' view, since it is quite easy to imagine all the stupid things people can do.

Opting for a 'realistic' view I think we are stuck with people doing stupid things for a long time - even if it does get temporarily better - because people are biased as all shit against clear thinking, and mass-society worsens these biases.

Ultimately, of course, the human race will have to get its shit together at some point or else the sheer energy at our command will wipe us out.

Vichy, I think your apparent pessimism is evidence of the same mistake that authoritarians make about human nature.

Sure, humans do stupid things. And we'll be doing stupid things for a long time. But despite all that stupidity, the human species is remarkably successful. Certainly one can argue that there are other, more successful species, but that's not the point. Humans have come a long way in a very short time.

And with all this success staring us in the face, we're so often inclined to think that, if something isn't done soon, we're going to ruin it all. I'm not sure there's really a lot of evidence to support that kind of thinking, though.

Your "sheer energy" comment reminds me of Malthusian arguments, or beliefs about peak oil. I think it underestimates people's aggregate ability to overcome challenges, even apparently overwhelming ones.

With nothing but progress behind us, I can't understand why so many see nothing but doom and gloom ahead of us.

I didn't really come up with that, but I can't remember to whom to attribute it, so I'll just say it approximates my view.

But despite all that stupidity, the human species is remarkably successful.
Oh, yes - because conceptual rationalizing is balls-to-the-walls 10 bajillion times more effective than natural selection.

Please don't interpret me as being essentially 'down' on the human race - as often as it might seem like that. I primarily criticize human beings for not doing as well as they easily could, if they weren't so influenced by evolutionary biology. Nietzsche becomes more impressive to me every year I live. How much the phrase 'human - all too human' conveys to the ears ready to hear it! As he said, some men are 'born posthumously'.

And with all this success staring us in the face, we're so often inclined to think that, if something isn't done soon, we're going to ruin it all. I'm not sure there's really a lot of evidence to support that kind of thinking, though.
I don't mean they're screwed in any forseeable period - I just mean that, once we start messing around with nano-clouds, if we don't have our shit together, we are likely dead. Thankfully, having one's 'shit together' may be a prerequisite for developing the kind of capital industry capable of producing nano-clouds.