To Boost Growth, Unleash Creative Destruction

"Creative destruction," a term first used by Joseph Schumpeter, is often misunderstood, because it conflates two separate processes. "Innovative destruction" occurs when a new product, service, or methodology radically changes a market. This process always begins with an innovation, with destruction or adaptation of competing markets occurring as time elapses to allow the value of the innovation to be recognized.

"Creative salvage" results after other forms of destruction have already occurred. This process does not generally originate with an inspirational leap, but rather with a realization of under-utilized value. Destruction might have resulted from the devastation of war, a weather calamity, under-employment, a popped bubble, a liquidity or solvency crisis, or misallocation of resources.

While only a few innovators create true paradigm shifts, creative salvage is open to all. At a yard sale, a foreclosure, or a bankruptcy liquidation individuals purchase under-valued assets, in the expectation of finding a gem. While these trading activities are analogous to normal market transactions, limited market-ability increases the probability of large gains or losses for both buyer and seller.

World financial markets are in turmoil. World debt is said to approach $100 trillion, while derivative commitments exceed $500 trillion. WOW, are we in trouble!

BUT, when a creative salvager takes a look; there has been no war to damage productive resources and, while the skills of the unemployed may not have been developed to their full extent, skilled human resources are abundant. Regarding the massive debt and derivative commitments; for every debt there is a creditor and for every short there is a long, netting out to zero.

Than what is the problem? World banking has attempted to reduce risk through diversification of assets, which means that banks own the debt of other [not so] "sound" banks and share the risk on loans of large borrowers. That attempt to spread and reduce risk has tremendously increased systemic risk. Since currency and credit are dependent on a fractional reserve system that could implode as a few major banks declare bankruptcy; our units of exchange are also at risk, which will affect trade and normal market activities. On top of everything, governments continue to interfere with markets and interest rates to such an extent that salvagers don't dare step in.

Prognosis: Fait currencies have proved to be a failure and in the future gold will have a large role to play. Eventually all this will work out. Creditors will take a big hit; but debtors probably not. Since everyone overdid it on debt, blame must be assigned to all. The U.S. will avoid early problems, but because we will probably refuse to take the necessary remedial actions our meltdown will be compounded by loss of the dollar as world reserve currency.

However, if we heed the early warning and reduce government spending by addressing entitlements in a meaningful way, allow too-big-to-fail to fail, and if we can stimulate our economy by clearing out unnecessary regulations and price and interest rate manipulation; we have a chance to lead the world out of this mess, by unleashing the creative salvagers among us.