April 28 2013
THE GREAT CRASH.
John Kenneth Galbraith, a Canadian by birth, Harvard professor of economics and an author of many books wrote The Great Crash 1929 in 1954, now almost 60 years ago. That Crash started The Great Depression.
In it Galbraith remarked that, “compared to earlier market downturns, those in 1893, 1907 and 1920, having happened they were over. Not so the one in 1929: it lasted well over a decade and actually circumstances became worse: what looked one day like the end proved on the next day to have been only the beginning.”
After weighing all the evidence, Galbraith concluded: “Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small”. He stated that the crash was caused by five weaknesses, of which the first was “The bad distribution of income: the rich had a disproportionate part of the available wealth”, something also true today. Other factors were the bad banking and corporate structure, the dubious state of the foreign balance and the poor state of economic intelligence. Most of this is applies to today with Climate Change doubling the risk.
The real message of the book is a warning- a warning that 1929 might very easily happen again. We are still waiting, but I am sure that someday somebody will write a book with the same title but a different date. That date could well be 2013 or 2014.
History does not repeat itself, but it rhymes, somebody once said, so it’s advisable to look at the past to understand what’s going on now. G. K. Chesterton wrote in 1933 that “The disadvantage of men not knowing the past is that they do not know the present.” Today that past – 1929 – tells us that economic crashes do happen, can last a long time, but would probably have a different outcome.
Robin Hood in reverse: robbing the poor to pay the rich
Ben Bernanke, the current Captain of The Money Ship in Washington, was a professor of economics at Princeton University. He made the study of the Depression his life-long task, concluding that during that lost decade the Federal Bank had been too tight in its money policy. So immediately after the 2008 Crash he pumped trillions of dollars into the banking system to replace the losses the banks had suffered with the millions of ‘underwater’ mortgages. He is still at it, expanding the money supply each month with $85 billion. All the large banks greatly benefited from this over-generous debt forgiveness because, in the fall of 2008, every major US bank was on the verge of insolvency caused by their reckless assumption of enormous debts to finance speculative investments often using derivatives such as credit default swaps (CDC) that had been created by the same group of large banks. When their debts overwhelmed their assets, the government bailed them out at the expense of taxpayers’ money. The Big Boys with their enormous annual bonuses were compensated for their outrageous behaviour with the poor man’s money.
The immense amounts of money made available every month have resulted in interest rates hovering near zero, penalizing those who have savings and depend for their pensions on interest income: again a strike against you and me. Now Bernanke is trying to punish us even more: his real aim is to generate some inflation, and so repay the trillions of debt he created with cheaper dollars, again hurting the average citizen, because his greatest fear is ‘deflation’ where prices drop and money becomes worth more, something that happened during the Depression of the 1930’s and in Japan since 1990.
Back to the future
I believe that another cause of the Depression was the sudden availability of cheap energy. In 1929 the USA was simply drowning in oil. GM bought up and closed bus companies and transit systems, advertising that cars – not trains or buses- were the future of the world. John Deere, Allis Chalmers, International, Massie Harris, all touted tractors and other mechanical tools as the wave of the farming future. True, the 1929 Crash was at least partly caused by the sudden surplus of manpower created by cheap fuel capable of generating hundreds of carbon-based horsepower replacing real horses and real men. They made hundreds of thousands of human lives redundant, and forcing them to flock to the cities where there were no jobs. Jobs only appeared when World War II came along and everything and everybody was mobilized to win that war.
After the war, with millions discharged from the armies, the pent-up demand for cars, housing and furniture, the generous allowances to study and liberal grants to buy properties all served to ring in an unprecedented period of prosperity, a Golden Age that lasted for about 50 years. Cheap energy played a dominant role here too with gasoline at rock-bottom prices.
There is something new under the sun
Ecclesiastes tells us that ‘there is nothing new under the sun,’ but these words are now out of date. John 13:34 urges us to love one another. That is no longer a mere moral given. The new approach also requires that we express this love by making sure that life’s essentials, such as water and air, are pure.
Everything has changed: the place of us humans within the natural world is not what it was: in my lifetime nothing has remained the same. Based on the optimistic view that cheap energy would be with us forever, we built an entirely new society. Everything we see around us is founded on the premise that cheap power is forever, evident in transportation, social relationships, finances, farming, manufacturing, globalization, outsourcing, and religion. They all have one wallop of weakness in common: one day fuel will cease to be plentiful or become too expensive: then there is no going back to simpler ways. We have religiously, with the fervor of divine conviction, surrendered ourselves to three fallacies: (1) infinite resources, such as energy and clean water, (2) infinite economic growth on which our banking system and government largesse such as old age security and medical care depend, and (3) an infinite capacity of the atmosphere to absorb our waste.
Another, much greater Crash, to come.
All this ensures that a Great Crash or even a Greater Crash will happen again, and this time we will exactly know what will be its cause: we have sold our souls to material progress in an all-or-nothing bet. We are playing Russian roulette with all the chambers loaded. In other words: in a finite earth, with an ever growing population that, thanks to television and advertising and the simple construct of contemporary enterprise, wants ever more of everything, we are betting on infinite growth to survive, a mathematical impossibility.
Greenspan, the predecessor of Bernanke, in testimony before the US Senate was quite open: “To exist you need an ideology. Everyone has one.” How true. Faith in infinite growth motivates governments, judging by the song books coming from the finance ministers from Brussels to Washington, with Ottawa being one of the chorus leaders.
Spend or Cut: the false choice
Now the words of the song are stuck in a groove, and come out totally garbled. Its vibrations sound like- spend-yes-cut-no – spend- no- cut- yes. Actually there is no real difference: spend means now; cut means get rid of some fat so that, a bit leaner, growth can pick up faster. Both ‘cutters’ and ‘spenders’ are true believers in economic growth. Wrote the Financial Times last week: “The world’s leading economies acknowledged on Friday that ‘further actions are required’ to put the global economy on track for strong, stable and balanced growth, but the opinions are divided between balancing the budgets, trying to curtail debts, or flooding the market with more cash.”
The Idol of Growth is just that: an idol
The only good thing about all this is that if and when it becomes clear that there is no growth left in the system, all its one-dimensional advocates, from both the Spend! and the Cut! parties, will disappear into a great void. They have no idea what to do without growth. There is no economics class that teaches them. The simple truth is that too much debt makes future growth impossible, because debts have to be paid before people start buying again. Even if economic debt is paid, there remains the ever accelerating environmental debt. The 1929 Depression was solved by World War II. It was caused in part by tractors and combines eliminating warm bodies. We now are at the verge of another depression, this time caused by too much debt, by clever robots, ever smarter software and the declining state of nature. Sorry young people! For most of you in the Western world, your own living standards are going to be below those of your parents. Given your levels of unemployment, the duration of it, and the fast rising levels of debt, it’s not a very big gamble to say that this will be true for the majority among you. Nor is it that much of a gamble to suggest that this will constitute a – major – turning point in our societies.
You’re caught up by the direct result of idol worship, because economics is a religion, complete with priests and churches and rituals and deities serving the divine dogmas of Economic Growth. The trouble with a false religion is that it needs sacrifices. You are the sacrificial lambs.
What sort of Crash is coming?
I believe there is a distinct possibility that this time the Crash will be much more all-encompassing. Some people claim to have discovered a frightening pattern that points to a massive economic catastrophe unlike anything ever seen before. “What this pattern represents is a dangerous countdown clock that’s quickly approaching zero,” said Keith Fitz-Gerald, the Chief Investment Strategist for the Money Map Press, who predicted the 2008 oil shock, the credit default swap crisis that helped bring about the recession, and the Greek and European fiscal catastrophe that is still wreaking havoc until this day. These people found an identical pattern in the USA debt, total credit market, and money supply that guarantees they’re going to fail. This pattern is nearly the same as in any pyramid scheme, one that escalates exponentially fast before it collapses. Governments around the globe are chiefly responsible. And what’s really disturbing about these findings is that the pattern isn’t limited to our economy. They found the same catastrophic pattern in our energy, food, and water systems as well: all these systems could all implode at the same time: Food, water, energy, money: Everything.
Dr. Kent Moors of Duquesne University, one of the world’s leading energy analysts, who advices 16 world governments on energy matters and who currently serves on two State Department task forces on energy, also voiced concerns over what he and his colleagues uncovered. “Most frightening of all is how this exact same pattern keeps appearing in virtually every system critical to our society and way of life,” Dr. Moors stated.
The pattern that’s hard to see unless you understand the way a catastrophe like this gains traction,” Dr. Moors says. “At first, it’s almost impossible to perceive. Everything looks fine, just like in every pyramid scheme. Yet the insidious growth of the virus keeps doubling in size, over and over again – in shorter and shorter periods of time – until it hits unsustainable levels. And it collapses the system.”
It all has to do with debt. For 30 years – from the 1940s through the 1970s – the US total credit market debt was moderate and entirely reasonable. But then in seven years, from 1970 to 1977, it quickly doubled. And then it doubled again in seven more years. Then five years to double a third time. And then it doubled two more times after that. Where we were sitting at a total credit market debt that was 158% larger than our GDP in the early 1940s… By 2011 that figure was 357%.
Dr. Moors warns this type of unsustainable road to collapse can be seen today in our energy, food and water production. All are tightly connected and contributing to the economic disaster that lies directly ahead.
According to polls, the average American is sensing danger. A recent survey found that 61% of Americans believe a catastrophe is looming – yet only 15% feel prepared for such a deeply troubling event.
The 1929 Great Crash came out of the blue. Will the next, much greater Crash, also come totally unannounced?
Next week: How to prepare for a possible collapse.
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