The "Greater Depression"

Mason By Mason, 11th Oct 2010 | Follow this author | RSS Feed
Posted in Wikinut>Money>Economics

I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts.

The New Great Depression - The "Greater Depression"

This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects.
In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade.
Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.

A Brief Summary of Our Story So Far….
Before we get to where things stand at the moment, let’s briefly look at where we‘ve come from.
That a depression was in the cards has been foreseeable for decades. The distortions cranked into the system in the ‘60s – the era of “guns and butter” spending by the government – resulted in the tumult of the ‘70s. Things could, and one could argue should, have come unglued then. But they didn’t, for a number of reasons that have only become clear in retrospect:
•Interest rates were allowed to rise to curative levels;
•The markets were non-manipulated and so, as they became quite depressed, were left to send out real distress signals;
•The U.S. was still running a trade surplus;
•The dollar had only come off the gold standard in 1971 and was still relatively sound.

Then, starting with Reagan and Thatcher, the world’s governments started cutting taxes and deregulating. The USSR collapsed peaceably. China, then India, made a shift toward free markets. And on top of it all, the computer revolution got seriously underway. All told, a good formula for recovery and a sound foundation for a boom.
But sadly, taxes, government spending, and deficits soon started heading much higher. Despite the collapse of its only conceivable enemy, U.S. military spending continued to skyrocket. Monetary policy encouraged everyone to take on huge amounts of debt, much more than ever in the past, and everyone soon found they could live way above their means. The stock, real estate, and bond markets got pumped up to ridiculous levels. The main U.S. export became trillions of paper dollars. Worst of all, the U.S. devolved into just another country, undistinguished by anything other than a legacy of a high standard of living.

The standard of living in the U.S. is now going down for these reasons, and others. But most disturbing to the average American is the falling position of the U.S. relative to the rest of the world. In brief, Americans won’t take kindly to the notion that they can’t continue earning, say, $10-40 an hour, for doing exactly the same thing a Chinese will do for $1-4 an hour.

What’s going to happen is that the Americans’ earnings are going to drop, while those of the Chinese are going to rise, meeting someplace in the middle. Especially when the Chinese works harder, longer, saves his money, and doesn’t burden his employer with all kinds of legacy benefits, topped off with lawsuits. This is a new threat, one that can’t be countered with B-2 bombers. It’s also something as big and as inevitable as a glacier coming down a valley during an Ice Age.
This, along with other problems presented by the business cycle have ushered in the Greater Depression.
How Long Will the Greater Depression Last?
Let’s briefly recap two definitions of a depression, along with a couple of examples, with an eye to seeing how things may evolve from here.

One definition is that a depression is a period of time when most people’s standard of living drops significantly. Russia had this kind of depression from roughly 1917 to 1990, so more than 70 years. A second definition is that it is a period of time when economic distortions and misallocations of capital are liquidated. Russia had this kind of depression from 1990 up to about 2000. It was very sharp but relatively brief.
The difference between these two examples is that, during the first, the state was in total – or even increasing – control. By the time of the second, the country had greatly liberalized. As a result, the depression was a period of necessary and tumultuous change, rather than drawn-out agony. A depression can be a bad thing or a good thing, partly depending on which definition applies.
Today, things are problematic in Russia for a number of reasons that aren’t germane to this article. But people can own property, entrepreneurs can start businesses, and the top tax rate is 11%. The depression of 1990-2000 resulted in greatly improved conditions in Russia.

Let’s look at a couple of other examples: Haiti and Mozambique.
Haiti has been a disaster since Day One and has no current prospect of improvement. The billions of dollars Obama is idiotically about to send them will evaporate like a quart of water poured into the Sahara – just like the billions of aid and charity that have gone before it. Worse, it will eliminate the necessity of Haiti making meaningful reforms. Additional aid actually precludes the possibility of liquidating distortions, misallocations of capital, and unsustainable patterns of life. It’s counterproductive.
Mozambique went through a long and nasty civil war from about 1970 to the early ‘90s. The war made conditions worse than anything even Haiti has seen. But when it came to an end, the Mozambicans changed things simply in order to survive. The place is hardly a beacon of the free market today, but duties and taxes have been reduced, most parastatals have been privatized, and entrepreneurs can operate. It’s a good sign that the country is drawing foreign investment but very little foreign aid, which always just cements people in their bad habits while ensuring government officials stay in office.

Why do I bring up these examples? Because it’s clear to me the U.S. is heading in the direction of Russia before 1990, or Haiti today. Not in absolute terms, of course. But everything the U.S. government is doing – raising taxes, increasing regulations, and inflating the currency – is not only the wrong thing to do, but exactly the opposite of the right thing.

This is really serious, because the government is the 800-pound gorilla in the room. What governments do makes all the difference – actually the only difference – in how countries perform. How else to explain that Haiti and Singapore were on pretty much the same level after World War 2, and look where they are now.
To my thinking, the U.S. is now clearly on the path Argentina started down with the Peron regime. Cause has effect. Actions have consequences, and the result will be much the same. Except I believe the descent of the U.S. will be much faster, much scarier, and will end in a much harder landing than that experienced by Argentina.

I say this because there’s no realistic possibility the Obama regime is going to change course. To the contrary, they’re likely to accelerate in the present direction. They believe the government should direct society – as do most Americans at this point. They feel government is a magic cure-all and not only can but should “do something” in response to any problem. Most complaints aren’t that they’re doing too much, but that they’re doing too little. Everything on the political front, therefore, is a disaster. There’s absolutely no prospect I can see that it will get better, and every indication it will get worse.

I’m not going to try to predict what will happen in the 2012 elections, but it’s fair to say the last several elections are indicators of the degraded state of the average American. What are the chances they’ll make a 180-degree turn, in the direction of someone like Ron Paul? I’d say close to zero, and libertarianism will remain a fringe movement, at best. Will Boobus americanus vote for someone who says the government should actually do less – much less – in the middle of a crisis? Especially if the current wars expand, which is quite likely in this kind of environment? No way.
Simply, the chances of a reversal in what passes for the philosophical attitude of this country are slim and none. And Slim’s left town. While there are some who hope for an improvement on the political front, I think that’s very naïve.

The Tea Party movement? Its ruling ethos appears to be a kind of inchoate rage. I sympathize with the fact that many seem to be honest middle to lower middle-class Americans who see their standards of living slipping away and don’t know why, or how to stop it. They feel bad that it’s no longer the America portrayed in Jimmy Stewart and John Wayne movies, but many are quick to blame the changes on swarthy immigrants. They’re desperately looking for a political solution. These folks tend to be highly nationalistic and atavistic, with a tendency to worship their preachers and the military. I just hope some popular general doesn’t get political ambitions…
The only bright spots – but these are very major bright spots – are in the areas of individual savings and technology.
As things get worse, the productive members of society will redouble their efforts to save themselves by producing more while consuming less; the excess will be savings. Those savings create a pool of capital that can be used to fund new businesses and technologies.

The problem here is that with the dollar losing value quickly, the savers will be punished for doing the only thing that can really improve the situation. And they’ll be discouraged by wrongheaded propaganda telling people to consume more, not to save. Funding new business and technologies will be harder with more regulations. But still, people will find a way to set aside a surplus. And that is a factor of overwhelming importance.

As are breakthroughs in science and technology. Don’t forget that there are more scientists and engineers alive today than have lived, altogether, in all of previous human history. These are the people that will wind the main stem of human progress. And their numbers are going to grow. So there’s real cause for optimism.
The problem is that most young Americans now go in for things like sociology and gender studies, whereas the up-and-coming scientists and engineers are primarily Chinese and Indians who, even if they get advanced training in the U.S., tend to go back home afterwards. Partly because the U.S. discourages hiring non-Americans for “good” jobs, but mostly because they can see more opportunity abroad.
So, how long will the Greater Depression last? Quite a while, at least for the U.S.

Tags

Depression, Economic And Social Issues, Economic Issues, Economic Trends, Economics, Economy, Fiscal Policy, Great Depression, Greater Depression, Recession, The Greater Recession

Meet the author

author avatar Mason
A self-employed entrepeneur. I spend my days going to gym, working online for a couple of hours, then out with friends or travelling the world.

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Comments

author avatar Mark Gordon Brown
11th Oct 2010 (#)

where I live there is talk of "recession" and so forth, but when I go out, all I see is construction and "Help Wanted" signs.. I think all the talk is a problem, I live in Alberta Canada by the way, and in Edmonton its business as usual, but they still say "recession"

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author avatar Mason
12th Oct 2010 (#)

similar situation where i am from(gold coast, australia) (not living right now) but i am travelling atm and there are some big problems i have seen....i guess some places are lucky....

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author avatar James R. Coffey
12th Oct 2010 (#)

You make a lot of good points!

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