MARCH 11 2017.
AN ALL-ENCOMPASSING CRASH COMING?
We live in interesting times, so interesting that they are truly in tune with the Chinese curse: may you live in ‘interesting times’.
Every day we hear or see or read another ominous news item. David Stockman, former budget director under Donald Reagan, predicts that March 15, just a few days away, will be the beginning of the end, because on that day the DEBT CEILING of TWENTY TRILLION (USA) DOLLARS will be reached. After that the USA Government is no longer allowed to borrow and thus will soon run out of cash.
Yes, AMERICA is living far beyond its means, going into hock, adding DEBT to the tune of more than $75 Billion each month. We in Canada worry that its Federal Government has a $30 Billion annual deficit and, as its economy is one-tenth the size of its southerly neighbor, its shortfall is proportionally a third of the enormous USA one: $300 Billion versus $900 Billion. The Republicans in the USA have been clamoring for a balanced budget – which means either much higher taxes – which they don’t want – or cut programs, which will harm voters. Deeply divided by this dilemma, politicians might just refuse to add to its $20 Trillion debt.
This means that in a few months everything may grind to a halt: interesting times, indeed.
Then there is Janet Yellen, the chair of the Federal Bank in Washington. She wants repeated interest rate hikes, now at a historic low. Any increase there, makes the debt more expensive. But inflation is on the rise, soon exceeding the low return on money.
The banks love debt because they are the ones who benefit. If I were to buy a house for, say $1 million (now quite common apparently), the bank is eager to give a $900,000 mortgage, which it creates out of nothing. At the current 3% it makes a gross profit of $27,000 per year.
But suppose that house prices drop. Suppose that interest go up and house prices go down – as they always do when the cost of money increases – what will happen to the economy?
So let me take a look at conditions in 1929. 1929?
I have this book in front of me: THE GREAT CRASH 1929 by the well-known Canadian born, Harvard professor, John Kenneth Galbraith.
We may remember that the Great Crash of 1929 was followed by the GREAT DEPRESSION of the 1930’s.
President Trump ran on the slogan: MAKE AMERICA GREAT AGAIN and many believed him, especially those for whom the last 20 years have meant hardship. Thanks to automation millions of jobs have disappeared and Americans, facing reduced income, have borrowed money at extremely low cost to continue their highly polluting lifestyle. Sooner than later the bill comes due, and that bill will involve much more than money.
Yes, another CRASH is coming. The only question is “What form will it take?”
Let me start by saying that we should never trust a politician or an economist. As the summer of 1929 drew to a close – just before THE GREAT CRASH – the celebrated Yale university economist Irving Fisher wrote in the New York Times that “Stock markets have reached what looks like a permanently high plateau.”
Today is no different. Trump boasts that, thanks to him, the stock market is setting new highs. Well……… what goes up can also go down. Look what happened then, almost 90 years ago.
By June 1932, in three short years, the New York stock exchange saw repeated losses in amounts so great that the stock market had lost 90% of its value and the world had changed utterly.
The Great Crash was followed by the Great Depression, the biggest setback to the global economy since the dawn of the modern industrial age in the middle of the 18th century. In three short years a quarter of America’s working population was unemployed and desperate. Galbraith put it this way, “Some people were hungry in 1930 and 1931 and 1932. Others were tortured by the fear that they might go hungry.”
Germany.
Across the Atlantic, Germany was suffering its second economic calamity in less than a decade. In 1923, the vindictive Versailles peace terms had created hyperinflation, when one dollar could be exchanged for 4.2 trillion marks, and cigarettes were used as money. I remember being in Germany in 1947 when cigarettes again were the best currency: I bought a glass of tepid beer for one cigarette, tax-free, fresh from England where I had come from sailing to Sweden through the Kieler Canal.
In 1932 more than 40% of Germany’s industrial workers were idle and Nazi brown-shirts were fighting communists for control of the streets, preparing the way for Adolf Hitler who needs no introduction, I believe, a direct consequence of the 1930’s Depression.
Let me quote Galbraith and his THE GREAT CRASH 1929.
Writes Galbraith, “We do not know why a great speculative orgy occurred in 1928 and 1929. The long accepted explanation that credit was easy and so people were impelled to borrow money to buy common stocks on margin is obviously nonsense……..Far more important than rate of interest and the supply of money is the mood. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich.”
In those days, as Professor Dice observed, “The common folks believed in their leaders….such feeling of trust is essential for a boom.”
Yes, there are similarities between today and the 1930’s. Then and now the mood is upbeat. Then and now empires were crumbling, then the British, today the USA. Today Trump’s priority is America First, becoming isolationist, sealing the borders, building the wall, expelling millions and putting up a Border Tax, measures its citizens see as positive for now.
Governments in 1929, rather than running deficits and so pump extra money into the economy and creating jobs, aimed for balanced budgets, aggravating the situation. Only when World War II called for tanks and guns and warships and airplanes, and mobilized millions of men, full employment was restored.
Not too long ago – 2008 – the financial world too had a real scare. Thanks to the lessons learned from the Great Depression, borrowing costs were slashed, interest rates were cut to barely above zero; money was created through the process known as QE, Quantitative Easing, and banks were bailed out.
Yes, the governments, in their wisdom, rescued the banks, gave them trillions of dollars to compensate for their bad loans, but did nothing to relieve the indebtedness of its long-suffering citizens. They were hung out to cope with increasing debts, growing unemployment, and stagnant incomes.
Thanks to this shortsightedness we now have popular revolts reflected in Brexit, the Trump ascent and the growing rise of unrest in Continental Europe.
It is now clear that ‘this rescue the banks’ policy was only a partial success. Low interest rates and quantitative easing have averted Great Depression 2.0 by flooding economies with cheap money. This has driven up the prices of assets – shares, bonds and houses – to the benefit of those who are rich or comfortably off.
The rich always get their brakes, while the poor perish. The current healthcare politics in the USA confirms this. As for debt: Governments don’t change their policies: they always push the problem ahead in an (vain) effort to engender GROWTH.
That’s what Galbraith wrote in 1954, at the end of his book,
“Inaction will be advocated in the present even though it means deep trouble in the future.”
That future is now!! Troubles have accumulated to the point where the bills are due.
DEEP TROUBLE ON THE WAY
Deep trouble is now upon us. Trump, during his campaign did manage to say something that was true: “America is in deep trouble”, but what followed was his biggest lie ever: “Only I can fix it.” Sorry Donald: “You are not God”.
So far his actions have not been encouraging. He will stand and fall with his promises, of which two are major ones: “Create 25 million new jobs, and give everybody excellent healthcare at a fraction of the current cost.”
Both promises are impossible to implement.
That will cause trouble. I sense the onset of a general physical depression for millions of Americans. The current optimism will soon turn sour and result in anger and rioting.
As noted before, the mood in 1928 was one of confidence and optimism and conviction that ordinary people were meant to be rich. Then too the common folks believed in their leaders, as many still do in Trump.
True, cheap money has fueled the stock market and in Ontario, at least, increased house prices, but what goes up, can and will go down, as happened in the early 1930’s when stock prices decreased by 90 percent, wages went down, unemployment rose, and people starved, literally.
Then many still had a rural connection, as urban population was a fraction of what it is now. Then those in need of food could go back to their roots, the simple ‘grow your own’ economy still in existence, but no longer now.
Today even the exurban crowd is totally dependent on the faraway grocery store, a place itself only having a one to three day supply.
The old rule still holds: what cannot continue will not: sooner than later reality will be revealed.
The naked facts are that we cannot have perpetual growth in a finite world.
This time when the CRASH comes, it will not be confined to mere money, or limited to stocks and bonds and falling real estate. Finance is only one segment of the economy: there also are numerous other factors that will put a stop to the craziness that is our current society, where once in a millennium events are becoming common place, especially in the weather.
We, in our hubris, in our overweening pride, have not learned the fundamental lesson that creation cannot be ignored.
When, in Paradise, in the Garden of Eden, in that perfectly ideal situation, God showed humanity around, he pointed to the fruit trees, describing them as “beautiful to look at and good for food” (Genesis 2: 9), emphasizing that the aesthetic has priority over the economic.
Sadly this reminder was soon ignored. In the next chapter, Genesis 3: 6, a greedy human eye saw the tree as “Good for food and pleasing to the eye”.
Greed, unchecked desire, the lust for more at the expense of creation, is now backfiring so badly, that all of creation, the totality of what we call nature, is in uproar, is agitating against the actions of the planet’s tormentors. Guess who or what will come out on top.
We are in a losing battle. Yes, one of the consequences will be in the monetary section because, as Paul, the apostle, told his protégé Timothy, “The lust for money is the root of all evil” (1 Timothy 6: 10). Thanks to our love for money we have sucked the fish from the seas, paved the planet, killed the elephants, eroded the soils, felled the forests, are wasting away the waters, so that all we have left are our toys, our oversized houses and cars, our unmanageable debts, our multiple electronic devices, all poor substitutes for reality.
Another crash? Multiple crashes.
Already the real rich are fleeing. A recent article in the NEW YORKER tells us that they are buying places in New Zealand and other far away countries with stable and homogeneous populations. Their jets are ready, including the families of the pilots.
When, not if, the crash comes, it will come sudden, just as in 1929. But its magnitude will be many times more horrendous because it will be multi-dimensional, include earthquakes, hurricanes, hell-like heat, polar cold, extremes all around.
It reminds me of Malachi 3: 2: “But who can endure the Day of his coming? And who can stand when he appears?”
God is no patsy. He will not forever let his precious creation be abused.