Posts
"The
Greater Depression Has Started" - Comparing 1930s & Today
8
April, 2016
You've
heard the axiom "History repeats itself." It does, but
never in exactly the same way. To
apply the lessons of the past, we must understand the differences of
the present.
During
the American Revolution, the British came prepared to fight a
successful war—but against a European army. Their formations, which
gave them devastating firepower, and their red coats, which
emphasized their numbers, proved the exact opposite of the tactics
needed to fight a guerrilla war.
Before
World War I, generals still saw the cavalry as the flower of their
armies. Of course, the horse soldiers proved worse than useless in
the trenches.
Before
World War II, in anticipation of a German attack, the French built
the "impenetrable" Maginot Line. History repeated itself
and the attack came, but not in the way they expected. Their
preparations were useless because the Germans didn't attempt to
penetrate it; they simply went around it, and France was defeated.
The
generals don't prepare for the last war out of perversity or
stupidity, but rather because past experience is all they have to go
by. Most
of them simply don't know how to interpret that experience. They are
correct in preparing for another war but wrong in relying upon what
worked in the last one.
Investors,
unfortunately, seem to make the same mistakes in marshaling their
resources as do the generals. If
the last 30 years have been prosperous, they base their actions on
more prosperity. Talk of a depression isn't real to them because
things are, in fact, so different from the 1930s. To most people, a
depression means '30s-style conditions, and since they don't see
that, they can't imagine a depression. That's
because they know what the last depression was like, but they don't
know what one is. It's hard to visualize something you don't
understand.
Some
of them who are a bit more clever might see an end to prosperity and
the start of a depression but—although they're going to be a
lot better off than most—they're probably looking for this
depression to be like the last one.
Although
nobody can predict with absolute certainty what this depression will
be like, you can be fairly well-assured it won't be an instant replay
of the last one.But
just because things will be different doesn't mean you have to be
taken by surprise.
To
define the likely differences between this depression and the
last one, it's helpful to compare the situation today to that in
the early 1930s. The
results aren't very reassuring.
CORPORATE
BANKRUPTCY
1930s
Banks,
insurance companies, and big corporations went under on a major
scale. Institutions suffered the consequences of past mistakes, and
there was no financial safety net to catch them as they fell.
Mistakes were liquidated and only the prepared and efficient
survived.
Today
The
world’s financial institutions are in even worse shape than the
last time, but now business ethics have changed and everyone expects
the government to "step in." Laws are already in place that
not only allow but require government intervention in many
instances. This time, mistakes will be compounded, and the strong,
productive, and efficient will be forced to subsidize the weak,
unproductive, and inefficient. It's ironic that businesses were
bankrupted in the last depression because the prices of their
products fell too low; this time, it'll be because they went too
high.
UNEMPLOYMENT
1930s
If
a man lost his job, he had to find another one as quickly as possible
simply to keep from going hungry. A lot of other men in the same
position competed desperately for what work was available, and an
employer could hire those same men for much lower wages and expect
them to work harder than what was the case before the depression. As
a result, the men could get jobs and the employer could stay in
business.
Today
The
average man first has months of unemployment insurance; after that,
he can go on welfare if he can't find "suitable work."
Instead of taking whatever work is available, especially if it means
that a white collar worker has to get his hands dirty, many will go
on welfare. This will decrease the production of new wealth and delay
the recovery. The worker no longer has to worry about some
entrepreneur exploiting (i.e., employing) him at what he considers an
unfair wage because the minimum wage laws, among others, precludes
that possibility today. As a result, men stay unemployed and
employers will go out of business.
ELFARE
1930s
If
hard times really put a man down and out, he had little recourse but
to rely on his family, friends, or local social and church group.
There was quite a bit of opprobrium attached to that, and it was only
a last resort. The breadlines set up by various government bodies
were largely cosmetic measures to soothe the more terror-prone among
the voting populace. People made do because they had to, and that
meant radically reducing their standards of living and taking any job
available at any wage. There were very, very few people on welfare
during the last depression.
Today
It's
hard to say how those who are still working are going to support
those who aren't in this depression. Even in the U.S., 50% of the
country is already on some form of welfare. But food stamps, aid to
families with dependent children, Social Security, and local
programs are already collapsing in prosperous times. And when the
tidal wave hits, they'll be totally overwhelmed. There aren't going
to be any breadlines because people who would be standing in them are
going to be shopping in local supermarkets just like people who
earned their money. Perhaps the most dangerous aspect of it is that
people in general have come to think that these programs can just
magically make wealth appear, and they expect them to be there, while
a whole class of people have grown up never learning to survive
without them. It's ironic, yet predictable, that the programs that
were supposed to help those who "need" them will serve to
devastate those very people.
REGULATIONS
1930s
Most
economies have been fairly heavily regulated since the early 1900s,
and those regulations caused distortions that added to the severity
of the last depression. Rather than allow the economy to liquidate,
in the case of the U.S., the Roosevelt regime added many, many more
regulations—fixing prices, wages, and the manner of doing business
in a static form. It was largely because of these regulations that
the depression lingered on until the end of World War II, which
"saved" the economy only through its massive reinflation of
the currency. Had the government abolished most controls then in
existence, instead of creating new ones, the depression would have
been less severe and much shorter.
Today
The
scores of new agencies set up since the last depression have created
far more severe distortions in the ways people relate than those of
80 years ago; the potential adjustment needed is proportionately
greater. Unless government restrictions and controls on wages,
working conditions, energy consumption, safety, and such are removed,
a dramatic economic turnaround during the Greater Depression will be
impossible.
TAXES
1930s
The
income tax was new to the U.S. in 1913, and by 1929, although it took
a maximum 23.1% bite, that was only at the $1 million level. The
average family’s income then was $2,335, and that put average
families in the 1/10th of 1 percent bracket. And
there was still no Social Security tax, no state income tax, no sales
tax, and no estate tax. Furthermore, most people in the country
didn't even pay the income tax because they earned less than the
legal minimum or they didn't bother filing. The government,
therefore, had immense untapped sources of revenue to draw upon to
fund its schemes to "cure" the depression. Roosevelt was
able to raise the average income tax from 1.35% to 16.56% during his
tenure—an increase of 1,100%.
Today
Everyone
now pays an income tax in addition to all the other taxes. In most
Western countries, the total of direct and indirect taxes is over
50%. For that reason, it seems unlikely that direct taxes will go
much higher. But inflation is constantly driving everyone into higher
brackets and will have the same effect. A person has had to increase
his or her income faster than inflation to compensate for taxes.
Whatever taxes a man does pay will reduce his standard of living by
just that much, and it's reasonable to expect tax evasion and the
underground economy to boom in response. That will cushion the
severity of the depression somewhat while it serves to help change
the philosophical orientation of society.
PRICES
1930s
Prices
dropped radically because billions of dollars of inflationary
currency were wiped out through the stock market crash, bond
defaults, and bank failures. The government, however, somehow equated
the high prices of the inflationary '20s with prosperity and
attempted to prevent a fall in prices by such things as slaughtering
livestock, dumping milk in the gutter, and enacting price supports.
Since the collapse wiped out money faster than it could be created,
the government felt the destruction of real wealth was a more
effective way to raise prices. In other words, if you can't increase
the supply of money, decrease the supply of goods.
Nonetheless,
the 1930s depression was a deflationary collapse, a time when
currency became worth more and prices dropped. This is probably the
most confusing thing to most Americans since they assume—as a
result of that experience—that "depression" means
"de?ation." It's also perhaps the biggest single difference
between this depression and the last one.
Today
Prices could drop,
as they did the last time, but the amount of power the government now
has over the economy is far greater than what was the case 80 years
ago. Instead of letting the economy cleanse itself by allowing the
?nancial markets to collapse, governments will probably bail out
insolvent banks, create mortgages wholesale to prop up real estate,
and central banks will buy bonds to keep their prices from
plummeting. All of these actions mean that the total money supply
will grow enormously. Trillions will be created to avoid de?ation. If
you ?nd men selling apples on street corners, it won't be for 5 cents
apiece, but $5 apiece. But there won't be a lot of apple sellers
because of welfare, nor will there be a lot of apples because of
price controls.
Consumer
prices will probably skyrocket as a result, and the country will have
an in?ationary depression. Unlike the 1930s, when people who held
dollars were king, by the end of the Greater Depression, people with
dollars will be wiped out.
THE
SOCIETY
1930s
The
world was largely rural or small-town. Communications were slow, but
people tended to trust the media. The government exercised
considerable moral suasion, and people tended to support it. The
business of the country was business, as Calvin Coolidge said, and
men who created wealth were esteemed. All told, if you were going to
have a depression, it was a rather stable environment for it; despite
that, however, there were still plenty of riots, marches, and general
disorder.
Today
The
country is now urban and suburban, and although communications are
rapid, there's little interpersonal contact. The media are suspect.
The government is seen more as an adversary or an imperial ruler than
an arbitrator accepted by a consensus of concerned citizens.
Businessmen are viewed as unscrupulous predators who take advantage
of anyone weak enough to be exploited.
A
major financial smashup in today's atmosphere could do a lot more
than wipe out a few naives in the stock market and unemploy some
workers, as occurred in the '30s; some sectors of society are now
time bombs. It's hard to say, for instance, what third- and
fourth-generation welfare recipients are going to do when the going
gets really tough.
THE
WAY PEOPLE WORK
1930s
Relatively
slow transportation and communication localized economic conditions.
The U.S. itself was somewhat insulated from the rest of the world,
and parts of the U.S. were fairly self-contained. Workers were mostly
involved in basic agriculture and industry, creating widgets and
other tangible items. There wasn't a great deal of specialization,
and that made it easier for someone to move laterally from one
occupation into the next, without extensive retraining, since people
were more able to produce the basics of life on their own. Most women
never joined the workforce, and the wife in a marriage acted as a
"backup" system should the husband lose his job.
Today
The
whole world is interdependent, and a war in the Middle East or a
revolution in Africa can have a direct and immediate effect on a
barber in Chicago or Krakow. Since the whole economy is centrally
controlled from Washington, a mistake there can be a national
disaster. People generally aren’t in a position to roll with the
punches as more than half the people in the country belong to what is
known as the "service economy." That means, in most cases,
they're better equipped to shuffle papers than make widgets. Even
"necessary" services are often terminated when times get
hard. Specialization is part of what an advanced industrial economy
is all about, but if the economic order changes radically, it can
prove a liability.
THE
FINANCIAL MARKETS
1930s
The
last depression is identified with the collapse of the stock market,
which lost over 90% of its value from 1929 to 1933. A secure bond was
the best possible investment as interest rates dropped radically.
Commodities plummeted, reducing millions of farmers to near
subsistence levels. Since most real estate was owned outright and
taxes were low, a drop in price didn't make a lot of difference
unless you had to sell. Land prices plummeted, but since people
bought it to use, not unload to a greater fool, they didn't usually
have to sell.
Today
This
time, stocks—and especially commodities—are likely to explode on
the upside as people panic into them to get out of depreciating
dollars in general and bonds in particular. Real estate will be—next
to bonds—the most devastated single area of the economy because no
one will lend money long term. And real estate is built on the
mortgage market, which will vanish.
Everybody
who invests in this depression thinking that it will turn out like
the last one will be very unhappy with the results. Being aware of
the differences between the last depression and this one makes it a
lot easier to position yourself to minimize losses and maximize
profits.
*
* *
So
much for the differences. The
crucial, obvious, and most important similarity, however, is that
most people's standard of living will fall dramatically.
The
Greater Depression has started. Most
people don't know it because they can neither confront the thought
nor understand the differences between this one and the last.
As
a climax approaches, many
of the things that you've built your life around in the past are
going to change and change radically. The
ability to adjust to new conditions is the sign of a psychologically
healthy person.
Look
for the opportunity side of the crisis. The Chinese symbol for
"crisis" is a combination of two other symbols - one
for danger and one for opportunity.
The
dangers that society will face in the years ahead are regrettable,
but there's no point in allowing anxiety, frustration, or apathy to
overcome you. Face the future with courage, curiosity, and optimism
rather than fear. You can be a winner, and if you plan carefully, you
will be. The great period of change will give you a chance to regain
control of your destiny. And that in itself is the single most
important thing in life. This
depression can give you that opportunity; it's one of the many ways
the Greater Depression can be a very good thing for both you as an
individual and society as a whole.
No comments:
Post a Comment
Note: only a member of this blog may post a comment.