APRIL 24 2016
THEN AND NOW
This week I am talking DEPRESSION, not the clinical type, but the financial one.
You’ve heard it before “History repeats itself.” It does, but never in exactly the same way. The depression of the 1930’s is still fresh in my memory. I am sure that we will see another one soon. But times have changed and the nature of the next DEPRESSION will be completely different.
For one thing it will affect many more. When the last Depression started in 1929 there were just over 2 billion of us on planet earth. We now have more than 7 billion, and these billions use a lot of carbon-stuff. In THE ENVIRONMENTAL HISTORY OF THE TWENTIETH-CENTURY WORLD, historian J. R. McNeill writes that “No other century – no millennium – in human history can compare with the twentieth for growth in energy use. In 1800 the world used 400 million metric tons of oil equivalent; in 1900 that had increased to 1,900, and in the year 2,000 to 33,000 million tons. He calculates that the world in the twentieth century used 10 times as much as in the thousand years before 1900 A.D. In the 100 centuries between the dawn of agriculture (basically since Adam and Eve) and 1900, people used only about two-thirds as much energy as we did in the twentieth century.
We now live with the unintended consequences of this tsunami of poison, as all that energy is Carbon-based and we now know what carbon-based fuels are doing to the world in general and to the less advantaged in particular.
Reading the New York Times of April 20 proved to be a depressing experience. Three items caught my attention:
(1) 330 million people in India – mostly small farmers and their families – face famine due to the failure of two monsoons.
(2) Thomas Friedman, in his regular Wednesday column, relates how in large segments of Africa the same drought drives men to seek jobs in Europe.
(3) Some 500 of these migrants drowned this past week trying to travel from Libya to Italy.
Our outrageous use of energy – unparalleled in human history – is causing this to happen. Shame on us. Shame on us.
That is one difference between the 1930’s and today: our extravagant use of Climate Change energy. Has life really improved because of it?
Last week I mentioned the KUHN CYCLE. Thomas Kuhn observed that progress is not steady and gradual, but is marked by sudden paradigm shifts. There’s a period of normality when everybody embraces a paradigm that seems to be working. Then drift sets in, where anomalies accumulate and the model begins to seem creaky and flawed. That too applies to the weather, as we now see not a linear (1,2,3,4,5) but an exponential (1,2,4,8,16) rise in temperature.
All this applies to a myriad of matters. Current economic theories no longer work. In spite of planet poisoning energy use – the equivalent of each of us being served hand and foot by some 200 slaves – life is more strenuous, more debt-ridden, more godless than ever before.
Take a look around: Democracy is at cross roads. Attempts to patch up the models fail. Everybody is in anguish, but nobody knows what to do. Established firms collapse and billion dollar companies become worthless overnight as the old remedies prove useless.
Times and circumstances change, but those in command look to the past for guidance which offers no solution, because the past no longer provides answers and, of course the future is unknown. Gone are the times when the future was a continuation of the past. Gone are the days when young people followed the parents and grandparents in church attendance. Gone are the days of financial security.
Take pensions. For a while I was a member of a pension board, overseeing not a large fund, about $150 million. The assumption then was that the moneys would earn about 8 percent per year, and thus future benefits were based on this assumption. That particular fund invested half in bonds and half in stocks. Bonds today earn only a pittance, while stocks are extremely volatile. Yet the assumption always was that the future would be as prosperous as the past. All the pension funds world-wide are faced with a dilemma: with bonds basically stuck at 2-3 percent yield, the money managers have artificially driven up the stock market in a desperate attempt to generate yield. More and more people depend on pensions, as savings are almost non-existent. No adequate pension means that many will have to work till the bitter end, leaving fewer jobs for young people.
How do today’s conditions compare to THE GREAT DEPRESSION which happened now almost 80 years ago?
John Kenneth Galbraith in THE GREAT CRASH 1929 tells a good story. This well-known Harvard economist – Canadian born – relates how prominent colleagues and leading politicians assured worried investors then that stocks were not overvalued, just days before they plunged to almost zero. Never trust a politician to offer accurate predictions.
Today we hear these same optimistic voices, but it seems to me that the next downturn will be much worse. Once the downturn starts the Good Times will never return. The 1930’s Depression was cured by the onset of World War II. A World War now will only make matters worse.
My reasoning is simple: the world is exhausted. There are Limits to Growth, and we have reached those limits. Nobody can exactly predict when this point is reached. Galbraith writes: “The causes of the Great Depression are still far from certain.” So no wonder the politicians and businessmen of the late 1920`s sounded quite sincere when they dismissed claims of a prolonged financial disaster. Once it had a grip on the nation, nothing seemed to work. In 1933 the total production of the economy was down by more than 30 percent.
During that Depression there was 25 percent unemployment, while the Stock market plunged to close by 90 percent. Canada – commodity oriented – saw even higher rates of unemployment: as high as 33 percent.
Then prices deflated and wages collapsed. My father in law who was a minister of a large congregation (in Groningen, the Netherlands) seeing how his parishioners were suffering, voluntarily asked for a decrease in his stipend, even as he had more than 10 kids at the time, my future wife included.
Then governments hated deficits and were loath to spent money they did not have. There was no money to support the needy, so people really suffered because they had no cash.
Economists always have been fascinated by the Great Depression and its mysterious appearance in spite of all signs to the contrary. I read one likely reason: with agriculture mechanizing, there was a sudden influx of no longer needed farm workers, and with no other jobs available they flooded the unemployment lines. With no social welfare programs at all, church and other charity agencies became overwhelmed, and the appearances of bread-lines and soup kitchens created an impression that nothing worked anymore and so people started to think that times were going to be bad and stopped spending.
Are matters different today? Yes and no.
The world’s financial institutions are in even worse shape than the last time. Then thousands of banks went broke. Now business ethics have changed and everyone expects the government to “step in.” Laws are already in place that requires government inter¬vention in many instances.
In the 1930’s depression if a man – there were very few women in the work force – 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 little 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.
Today, thanks to robots and lower overseas rates, wages too have been stagnant and even reduced. This is another reason why no recovery is possible: people earn less and have borrowed to keep up appearances. Fortunately today many can claim unemployment insurance, and, once this is exhausted, there is welfare, while the funds last.
However, Governments depend on tax income to pay benefits. When that decreases so do the payouts. Already today in the USA 50% of the country is on some form of welfare. Food stamps, aid to families with dependent children, Social Security, and local programs are already under severe pressure, and these are prosperous times.
Imagine a recession. Imagine a sudden collapse as happened without warning in 1929. With untold trillions in debt, the reckoning – so far being postponed by all sorts of gimmicks, including Zero Interest Rates – cannot be postponed forever. When the tidal wave hits, we’ll be totally overwhelmed.
Today entire generations have grown up without ever having learned how to survive with little money and no basic skills: computer skills or manipulating an I-pad will be no help. During the 1930’s the majority of the people in the world either were small time farmers or recently had left the country-side in search of jobs, but still had good rural connections back home. Today, even those who live in the country – including farmers – have no real survival skills. Most work far away which means that today 95 percent of North American people are city-oriented and money dependent.
Income tax came to the U.S. in 1913, and by 1929 the average family’s income was $2,335, which meant that they were mostly income-tax exempt. Also there was no Social
Security tax, no state income tax, no sales tax, and no estate tax. Today we all pay taxes in some form or another. In most Western countries, the total of direct and indirect taxes is over 50%.
However, given that governments’ expenditures for pensions, health care and welfare are constantly climbing, expect higher taxes, further reducing available income, and thus diminishing disposable income.
During the 1930s Depression deflation dawned: Will history repeat itself? No. Prices are dropping a bit today but the power the government has over the economy today 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 of dollars will be created to avoid de?ation and induce inflation. As a matter of fact plans are in the works to give everybody a guaranteed minimum income to ensure that spending power will be available.
I know that the Bible is not a book for science, especially economics. It does give some economic hints such as: The desire for money is the root of all evil (1Timothy 6: 10).
Curiously it also mentions that in THE LAST DAYS we will see INFLATION.
I find this in the Bible, in Revelation, the last Bible book, which suggests that in the Last Days (and I am sure there’s where we find ourselves today) we will experience INFLATION, BIG TIME.
Revelation, chapter 6 says that immediately after the second horse, right after the breaking of the third seal, the rider of the black horse arrives, carrying in his hands a scale, and while he proceeds, there is a voice that says: “A quart of wheat for a day’s wages and three quarts of barley for a day’s wages.”
Both that scale and these words signify poverty, hunger and inflation. Money loses its value and the costs of the normal daily needs increase all the time. A quart of wheat was about what one person needed to stay alive, which meant that a laborer by working could only earn enough to keep himself from starving, but not his family. Were he to use barley, instead of wheat, the situation would be more manageable, but even then it would be impossible to maintain a family. The prices mentioned here are about eight times the prices normal in those days.
I have mentioned already how in India and Africa, due to drought, food prices have increased dramatically. As Climate Change intensifies, even we in the Western world will be affected.
Brace yourself. Bad times are coming. My guess, it will be worse than in the 1930s as climatic conditions will greatly aggravate the food situation and trillions of debt will cause major inflation. Then, in the Dirty Thirties, Governments believed in balance budgets, causing untold hardships, which could quite well have been one of the causes that triggered World War II. Now, facing a Filthy Future, the unleashing of unlimited liquidity, by catapulting cash into the economy to cause inflation, this avalanche of money will destroy whatever is still valuable. What should we do?
That is next week’s topic.