December 12, 2008

By now, I suspect most out there have joined me in thinking of the current economic situation as the Great Depression of our times. Although the root causes were superficially different, the overall societal impact will probably be close to the same.

Because our patterns of society and even economic structure have changed, there will also be differences in how the economic fallout is felt. I can't say for better or for worse, because so many of these will be deeply individual and you will know better than I how they are likely to impact on your life. What follows is a mixture of how we got here and how things have changed since 1929. There is no advice here, only a skipping stone overview. After all, look where all the other advice has gotten us!

By now we all know the real estate speculation which started this particular crash when the rug was pulled out from underneath it. When I first heard that in some parts of the world negative interest mortgages were being offered, I knew that what has now come to pass was only a matter of time. I truly hope that those reading this have a roof over their heads this winter. It will be a hard one.

But the truth is, this thing was waiting to happen. During the Great Depression, what triggered it was a combination of stock market speculation (and a corresponding loss of trust in the banks) and raised protectionist tariffs: but again, triggered only. Whether or not you happen to follow any of the schools of economic thought that suggest that economic cycles great and small are as inexorable as the tides of the sea -- and we are right on schedule for the next Kondratieff wave -- it did not take a degree in economic theory to see that any economic structure based entirely on its own continuing expansion would have to reach a very sudden limit, followed by an equally sudden deflation.

The first wave, and catalyst, was the sudden faltering of real estate sales as prices outstripped demand. Mortgages which absolutely demanded a quick resale teetered on the brink of default, and then they tipped over.

Banks which really should have known better had overextended, and now they panicked, tightening credit for everyone. At the same time as the falling demand was beginning to erode home value, introductory interest rates on new mortgages expired. The first wave of speculative defaults dropped home values further, in the way that houses standing vacant in a neighbourhood will always do. People discovered that not only would their houses not sell, but their revised (and rapidly falling) values no longer sufficed even to pay off the mortgages on them. The home construction industry came to a screeching halt.

At the same time, the price of oil leaped to record levels, and stayed there just long enough to inflate the cost of staples and make a dent in the domestic automobile industry: at the time, it seemed as though this were just another of the many glitches which had been eating away at the bottom line. Apparently without warning, the stock market caught on to the fact that there was a fundamental loss of faith in the credit on which business values had been built: and the sudden plunge eroded pensions and the savings of those who had been led to believe that mutual funds were the only realistic way to save enough for retirement. This was the second wave, as those who had been living within their means -- just -- were tipped over the edge by the changing economic conditions and especially the suddenly tightened credit.

Business driven by the construction industry started to falter. The ripple effect of the earlier foreclosures and bankruptcies began to have a visible impact on consumer spending: but it was still only the storm clouds on the horizon. However, even this small hint of a downturn, combined with eroded stock values, was enough for some businesses otherwise completely unlinked to the real estate market to discover that the terms of their operating loans were changing: and for many of these, already strained by global competition, the tightened credit was one strain too many.

At the same time it was becoming apparent by just how much bank credit and inter-investment had magnified the potential for profit -- and loss. The initial panic now had a solid reason: the banks not only had overextended, they had not been paying attention to what the earlier terms of credit really meant, or else it did not register within their understanding of how the world worked. Some banks failed. Others were bought out at virtually bankruptcy prices.

Iceland discovered that its lack of regulation had resulted in its banks now being liable for a combined debtload equal to seven times the country's GDP. It asked for help from its economic and military NATO ally, the United States: and the United States refused. Then it asked for help from Russia, and Moscow said yes. We have not yet begun to see the fallout from that one.

And all this, folded together, was the third wave.

Have I said a single word that is not utterly self-evident yet?

We are currently in the middle of a fourth wave which ... well, look around you. Every business which goes bankrupt means jobs lost. Every business which is rescued by being bought out by another means jobs lost. Every business which has to tighten its belt to survive means jobs lost. Factories will shut down shifts and white collar alike, banks will trim their staff. Barack Obama said it exactly right and (for the first time in a very long time) with cold, objective accuracy when he said that things would get worse before they got better. I say that they will get quite a bit worse, and that this will last between five and ten years. We have at least two more waves to go, during which the real estate steamroller will begin taking out malls and office towers and over-expanded box stores selling unnecessary things, businesses will really start collapsing, and the unemployment rate in many parts even of the G8 will hit 15% and could easily hit 20%.

(India's economy is not immune. What is its current fast-forward built on?)

I also say that this is not entirely bad for us. We have tried to buy feelings for so long, we have forgotten that they need not be attached to products. As a society, we needed to remember that there is a difference between needs and wants, and we were singularly unwilling and perhaps no longer able to do so on our own. How often have we admired the character traits that came straight out of the Great Depression? Unfortunately, the re-discovery may be much harder on us than it was back in 1929. Let's do a bit of comparing.

Credit.

During the Great Depression, stock market margins were only 10%. During this last decade of home construction, no money down mortgages had become the norm, and even negative interest mortgages were readily available. Bill Fisher identifies overindebtedness and deflation as the predominant causes of the Great Depression, and divides the process into seven parts:Apart only from the effect of the gold standard, sound familiar?

Currency disconnected from the gold standard.

During the Great Depression, there was a run on physical dollars, which were reliably backed by gold and therefore in tightly restricted supply. Today, nothing backs floating currency except faith, and that is failing. The monetary cost of gold rises proportionately. Depending on the degree to which high technology remains in consumer demand, other metals may follow.

Town and country.

The sweep of road-building during the 1950s and 60s has irrevocably shifted the G8 countries into primarily citified societies. The Great Depression happened to coincide with the dustbowl drought, but even so, it was still easier for farmers to fall back on the products of their labour than for city dwellers to do so: and at that time, produce was still bought locally or not at all. As cities began to sprawl and reliance on the automobile increased (cause and effect being somewhat irrelevant, since each fed the other), public transit correspondingly eroded. Cars come off the lines every few seconds in N. America: why wouldn't there continue to be an indefinitely continuing market for that level of production? So completely has the face of transportation changed since 1929 that we can no longer conceive of a world where we cannot access any of its products at any time, in any season.

Globalisation.

Trade during the 1930s was nothing compared to trade now, although I would venture to guess that the percentage of true essentials has shifted sharply. Why would a company not shift its centre of operations to where the labour is cheaper and the regulations are looser? Why not import fruit from halfway across the globe, where the cost of production is nowhere near as high as for the domestic farmers slowly sinking? What consumer would not purchase the cheaper product? Where does that leave virtually every form of western mass production? At one point, it was beginning to look as though the price of oil would place a ceiling on the level of sustainable global trade, but that has fallen even faster than the value of real estate. Which brings me to --

Radio, television, Internet, cellphone.

Communications have evolved and expanded since the 1930s. In the United States, the primary means of financing these communications is a combination of service package and advertising. Advertising has already begun to be trimmed. Mass media Christmas-related commercials began later this year than for some years now. We were spared most of them until nearly two weeks into November! With the loss of advertising money and families revisiting which communications options they do and do not need, some communication channels will fail. It is a truly interesting time for a shift fully into digital broadcasting, since it forces all television watchers to pay money to a service provider to receive television at all. Will the Internet almost completely take its place? Will television digital access be bundled as a "freebie throw-in" with Internet access? Will advertising-financed free-access radio see a new heyday?

And finally: what brought us fully out of the Great Depression was the shift into a wartime economy during the opening moves of the Second World War. There is no such thing as unwilling unemployment in a wartime economy.

And now?

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