But as Nixon said, we're all Keynesians now. I'm inclined to think that there will be repeated collisions between production and demand on the depletion down slope.

The best way to look at this economy is to try and discern the hardest road to recovery ... that will be the only road.

Like the Great Depression, this crisis began several years before the 'official start date'. That Depression's start date was October 1929; it really began with the Great Panic of 1921. Our current crisis began with the 'Dot Com Bust' of 2001. During the interval in both instances there were historically low interest rates and flat (nominal) or declining wages. In both instances wages were depressed by official policies that favored business owners over labor as well as large scale immigration, both internal and external. Agricultural workers in their millions left for industrial labor in cities in the 1920's. There was an influx of more millions from Eastern Europe. Today, jobs are outsourced to lower wage-rate countries and government policy accepts large- scale immigration from Latin America, both documented or otherwise. In both instances, labor demands are suppressed; the stagnant wage component then and now is vitally important to the unwinding of both economies. The small claim wages made on the GDP expansions both in the 1920's and currently's was and is manifested as reduced purchasing power, masked in both instances by increases in consumer credit. Low central bank money rates substituted debt in place of savings as capital for investment purposes. During both run-up intervals there were historically large asset and credit bubbles. Cheap loans pursued reckless speculation which would have never been financed with more expensive forms of capital. There were spikes in stocks and real estate both in 1920's and the 2000's.

Both recessions were international with markets and trade collapsing. Banks failed world- wide. Unemployment both in the US and abroad exceeded 20%. During the active recession periods governments responded by implememting public spending initiatives, lowering money rates, lending to troubled banks, purchasing stocks and devaluing currencies. None of these steps had any real effect, unfortunately.

There are big differences between the two periods:

-- The world's major currencies in the 1920's were gold- backed hard currencies.
-- The level of indebtedness of the US in the 1920's was much less than today.
-- The US savings rate was +10% in the 1920's, even without government security programs, this was a 'do it yourself' safety net of sorts, plus a pool of investment capital that could be tapped.

-- Today, the primary source of capital in the entire world is debt.
-- Our US safety net is either unfunded or supported by debt.
-- The US debt is largely in the hands of overseas ministries that are - in general - far less robust than the US's financial system.
-- Developing nations in the 1920's and 30's made a much smaller claim on resources than they do today.
-- There were no nuclear weapons in 1920- 1944.

In order for the economy to 'right itself', wages will have to catch up relative to higher income earners. In the earlier period, this took place over 9 years and required legislation recognizing and supporting organized labor. The Keynesian doctrines as applied during the New Deal were not particularly relevant to this effort. The war mobiliztion of industry beginning in 1938 raised the wages of many workers in industries that were notorious for low pay. After 1945, wages remained high and the difference between high income earners and the low income earners was compressed.

This compression must be done in our period. Higher wages increase spending power and allow a fraction to be set aside as savings which in turn bcomes capital for new investments. Regardless of whatever eco-economic context exists over the next decade, there must be increased spending power and aggregated savings from which investments can be capitalized.

Catching up wages is almost impossible when companies are laying off large percentages of workers. Nevertheless it must be done.

Encouraging savings requires a return on money. The depressed rates of return on money - discount rates close to zero percent - are designed to stimulate demand, particularly consumer spending. This first assumes all participants in the economy are borrowers. This leaves out the needs of lenders and thwarts the ability of the market to direct capital most effectively and to do so by price rather than by (government) fiat. Because any demand for new credit requires its substitution for existing debt the stimulus effect is small or non-existant.

Consumers must first pay off or liquidate existing debts, then accumulate some savings; only THEN they will able to consume. This is again almost impossible, nevertheless it must also be done.

Currencies today are credit based, they require trust to function as means of exchange. Governments must answer the trust issue FOREMOST before the attempt is made to use monetary policy tools. The instinct of government is to borrow first then deal with consequences later, however default hangs like a guillotine over all the major currencies. A run on any of them - Euro, Pound Sterling, Yen, Won, Dollar - would quickly become a chaotic run on all of them, one and then another. Such a run is an article in Bloomberg away.

Unfortunately, reining in borrowed 'liquiodity' is almost impossible to do when the begger-of-the-moment has national prestige or is a campaign contributor ... nevertheless it must be done.

Until all these are done, there will be no recovery, just a sickening slide into greater and greater calamity, until the currencies are repudiated and governments declare emergencies and institute ration cards and command economies.

More parallels: command economies were installed world-wide in 1939-1945, so that road will also likely be followed.

In my opinion, the oil crunch will hit when Mexican production drops another 20%. That is ... if the country doesn't default, first.

Production elasticity in action. The graph tells evrything. Lets see how he will behave in the next few months.

@starship trooper

Were did you get the composite acquisition cost data from, and what does it represent?