Wednesday, September 09, 2009

1929 Depression With a New Ending

You’ll notice that this blog's name has the year 2006 in it, which seems somewhat dated. Many times readers have suggested that I change the year until I get it right.

From reading the personal accounts and tragedies of that time, the most impressive but elusive thing, is the time line. From a historical point of view, we refer to the Great Depression as an event of 1929. There was no depression in 1929. Things were still swinging. Granted Florida was already a basket case, but the rest of the country didn’t have a clue that something was wrong. Then, the stock market crashed in October of 1929. It wasn't until 1931 and 1932 that people realized things were real bad and then they got progressively worse into 1933. From there, there was no argument, we were either in a depression or you were a pretty blond, married to a Rockefeller.

The concept that the people back in 1929 were aware they were in a depression is a false assumption. In November of 1932 when Roosevelt ran for office, there was no argument that things were bad. Right after being sworn in 1933, FDR declared a long bank holiday and a thousand banks never reopened.

Obama appears to be our Hoover. Hoover was quite intelligent and no dummy when it came to running the government. FDR pretty much continued the programs he had put in place. The "New Deal" was new hope, a wish and a prayer, government programs that did little. The war brought us out of the depression.

Today's problems are similar to what confronted Hoover. He faced the frustration and the inability to control what was happening next. Back then, the voters felt misled. Things had gotten increasing worse, not better. There was the constant government banter that things were getting better.

This is an economic problem that can get a lot worse with more political intervention. There is no government solution. The time line to get out of this mess is quite a ways away. Hoover had 4 years and it took another 6 under FDR before we "turned the corner." Add 10 years to 2006 and you have a more realistic view of when this "Full Feature Film" will end.

Will we be ready for a "New Deal" come next election? People are already tired of hearing that the recession is over. Poverty is reality without the politics. Optimism is certainly not in the wind. Uncertainty is what the world is about.

This is playing out a little like the "Wizard of Oz," only this time when you click your heals together three times, you wake up broke, wishing you owned a home in Kansas.

28 comments:

Sackerson said...

Funnily enough, I've suggested 2016 some time back, too. I did this by comparing the Dow from peak in 1966 to trough in 1982 (adjusted for CPI), with the peak in 2000. Seven years to go, then.

christian said...

I teach finance and economics. You are dead on accurate with your assessment. Love the blog but can't find a link to follow. Please advise.

Poly said...

I completely agree with your analysis, this is a depression and you're blog title is correct.

But why the constant comparisons to the '29 depression? Surely you're not arguing that this depression is anywhere near the size and scope of that. It's clearly not, and if you're arguing that we just can't see it yet then I would encourage you to compare the first 3 years of each depression to see how much they differ.

I would add that I am sick of other sites/people saying that because this downturn does not compare to the great depression it must make this just the "worse recession" since.....this is a depression!
You're kind of arguing that this depression must match the scope of the 1929 depression to qualify as one and as such continuously attempt to highlight the similarities.
I love your site, keep up the great content.

Anonymous said...

Jim,
I agree. It will take another few years before the majority of Americans realize how bad thing are. Our current "leaders" will lose all credibility shortly because they are now circulating nonsense such as green shoots, recovery beginning (recovery to what I might ask?), etc. There are so many intensifying negatives in store for the US (more... unemployment, bankruptcies, foreclosures, bank failures, residential and commercial valuations dropping, consumer credit and spending going in reverse, etc. etc.)
There is no actual definition for a depression (too many variables in an ever changing system of internal economies won't allow a definition). But this is a structural problem and the core economic statistics are horrid and getting worse. So it is a depression, or... a great recession, who cares about semantics?
I'm sure that by 2011 or 2012, everyone... including our government clowns... will admit and confront the fact that we are in a depression... although a new and different version than the depression of the 30's.
When will the jobs, manufacturing, production, productive capacity, debt liquidation, increase in capital, housing affordability, consumer spending, trade balance, etc. come about to start us back onto a secular vector of growth?
With the monetary, fiscal and political strategies our government is using... it looks like it will be a long time coming.

Jim in San Marcos said...

Hi Sack

I think our agreement suggests, that common sense suggests a longer recovery time than that projected by the economists.

What worries me is Japan is in year 18 of their recovery and things are getting worse.

Jim in San Marcos said...

Hi Christian

Welcome aboard. What sort of links are you refering to?

Jim in San Marcos said...

Hi Poly

Glad you like the site.

I don’t think that I am really trying to measure our current problem with the 1929 depression. I am just trying to point out that we are very early into the downward drop. Very few people have been affected so far. There is no group consensus on this being a depression, or for that fact, a prediction that there will be a depression. You can only recognize a depression through the rear view mirror. Historians labels depressions.

As for size, this depression will make the 1929 one seem like a cakewalk. There is 4 billion more people in the world. There was no real government debt in 1929. Hardly anyone paid taxes and the government was small. There were no Social Security or Medicare benefits.

The only similarity I see is that the banks and pension funds are bankrupt. If you are of retirement age, you have some real problems. The money has been spent, 12 trillion dollars of our saving (80%). When government prints more dollars, nothing is produced. Now we have twice as many dollars chasing the same amount of real product produced.

All of us work to produce something to earn dollars. It kind of sucks when this new printed dollar is just as good as the one you had to work for. You can’t print cars, computers or food. Sooner or later you will demand real value for what you produce. A dollar is a measure of product produced, not a government certificate for sponsored consumption.

Bear in mind this is just how I see it. There are a lot of tea leaves left to be interpreted. Thank you for your comments.

Anonymous said...

My company announced 800 layoffs a few weeks ago, between several sites. Last week the nameless, faceless mailbox sent me an e-mail instructing me I "had WARN(s) to deliver". I handed out six. Good times.

One more thing... while they are eliminating 800 jobs, they are giving out twice as many WARNs to ensure they hit the bogey. For those WARNs that get rescinded, the employee gets to say, "Oh, Joy! How happy I am!"

Jim in San Marcos said...

Hi Anon 5:38

I'm in complete agreement. The government will never admit being in the midst of a depression. It's a little like a Surgeon saying "oops" during open heart surgery.

The thing that surprises me, is how long and drawn out this financial bubble has been. The problem was very obvious in 2006 and with all of the bad news in the last year, the ship is still floating.

My auto insurance just doubled from last year, and on the flip side of the coin, vegetables and produce have dropped 50% in price. The only guess I can come up with, is a lot of drivers don't have car insurance any more and poor people don't eat vegetables--(it sounds logical);>)

I think a lot of the retired will start to rethink their investment strategy. Three percent interest is not going to bring money into the banks. The silver foxes, just might want to hold gold (silver is a better buy).

The thing that scares me is what you mentioned. Where do these new USA industrial jobs come from? This country can't even come close to competing in the global labor market.

Looks like we dust off the Smoot-Hawley Tariff.

Jim in San Marcos said...

Hi Anon 8:13

I had to google WARN, I had an idea what it was-- "Worker Adjustment and Retraining Notification Act."

I have read lately that a lot of Human Resource centers are really stressed out over giving out termination notices. It is not the thing they were trained to do. It is easy to hire someone, but when you fire someone, the target takes it personally. I would expect a lot of ex-employees to go postal in the coming months (and we are not talking stamps here).

Thank you for the input, I hope things improve for you.

Take care.

AIM said...

Hi Jim,

We'll either have a hell of a depression, or a Japan-like "lost decade"... or series of lost decades... meaning a chain of protracted recessions, mini-depressions, possible stagflations, all joined together... and no growth.

Don't think the Fed will ever be able to create hyper-inflation. The deflationary pressures and wealth destruction is too overpowering... and China and our other big creditors would never stand for it.

I can't think of any "magic" that this or any future administration could possibly come up with to buoy or float us much further into the future. The day of reckoning is surely unavoidable.

Depression or lost decade... one or the other is my prediction.

Prepare for the worst, hope for the best... but definitely get you ducks in a row.

Feel sorry for retirees and wannabe retirees.

Jim in San Marcos said...

Hi Aim

Could it be possible to have government hyperinflation and deflation at the same time?

Assets already produced like housing could drop in price, Nobody has 20% to put down. Plus why buy it if prices are still dropping.

But if you want a steak, it has doubled in price, the government can't print steaks. People producing product are charging more.

I don't see a clear and simple solution here. I'm not pretending to have any answers either. Whatdayathink?

Anonymous said...

I live in an upper middle class area near San Francisco.
The people in my area are getting laid off in DROVES. They are senior managers, mid to late
50's in age.
This group of people are the ones who:
Pay most of the taxes in the U.S.
Buy new luxury cars.
Buy new homes.
Most of the ones I talk to advise that they can not even get interviews.
When THIS group is no longer employed, no longer paying taxes, it points to a severe, prolonged recession, with further deep cuts in employment for state and city workers.

AIM said...

Jim,
As to what I think... it doesn't seem feasible to have hyper-inflation and deflation at the same time. Yet with a new global economy, the errant business and economic models being used, govtmt intervention and economic malpractice I guess it is possible.

Hyper-inflation would seem to be a very difficult thing to achieve... there is just too much wealth that has been lost and so much more that will be lost... banks are not lending... and the Fed and Treasury know that if they inflate they will destroy the dollar and will also lose their creditors (our country's life blood) so I think all of the above forces will prevent hyper-inflation.
The USD is very weak now and many other currencies are soaring (Brazil, NZ, China, etc.). This is going to kill their export potential and prevent any chance of a recovery (if their prices are higher their exports will suffer). So we can expect intervention and they will manipulate their currencies down.
The USD looks bad now, but after this rally is over and the government's artificial stimulus is over... (I give these effects maybe 6 months to a year before they wear off) the stock and bond markets will collapse, res and comm real estate prices will continue to fall, unemployment will continue to rise, as will foreclosures and bankruptcies... thus, everyone will head back to the USD for safety and it will strengthen again.
It very well may be that we are going to have a deflationary depression at first (the downward force is just impossible to fight) and eventually we'll go into some sort of inflation. That is my guess.

Knowing when we will finally turn towards inflation is the key. If one is prepared and adjusts their cash and assets (portfolios) accordingly... they may survive.

I think what one does at this piviotal point will be the most important and significant econmic/financial decision one will make in this lifetime. It will mean survival or ruination.

That is my take on it. Sorry for being so long winded.

AIM

AIM said...

One other point I should mention...

Inflation is from increased money supply and increased credit (phenomena that are created by the Federal Reserve).

The banks are not lending and will not be lending for a very long time (credit is the main outlet for inflation).

The government has given all of this money to the banks but they can not make them loan.

The banks know what is coming... they were excessive and over-leveraged for years and now they will pay for it... they can't hide their illegal accounting actions forever... or forestall their foreclosure actions... plus, three more waves of foreclosures are coming over the next few years from alt-a and option arm mortgage loans... banks will eventually have to mark their assets to market... commercial and construction loans are heading into default now too... and all of the toxic mortgage backed securities that these banks are holding are eventually coming to light... and so on.

The banks know they are undercapitalized and will really be in a nightmare when all of the above comes to roost. They need all the money they have and can accrue to help keep them afloat when their day of reckoning comes.

So if they don't lend... no inflation and no growth/recovery.

The webs we weave.

AIM

Team said...

I see you said Obama appears to be the "hoover" of yesteryear. I think you mean he is our FDR, the "new deal" kid. :)

Hoover was like Bush, didn't do a thing about it.

Jim in San Marcos said...

Hi Team

FDR's "New Deal" was a reply to the raw deal everyone got in the previous 4 years. Hoover just took the blame.

The country won't see a turn around for another 10 years. Therefor, I think after 4 years of Obama Talk, the country will vote for change.

When you boil it all down, Congress runs the country and there is about an 8 to 12 year time lag between passage of legislation and it's economic effects. So if you want to blame an administration for our present mess, look back a few years to see who to give credit for what.

Obama will be the fall guy, just as Hoover was.

Jim in San Marcos said...

Hi Anon 7:55

That doesn't sound good up your way. Its that last 10 years from 55 to 65 where we really go into savings mode for retirement. Being giving a pink slip really puts a crimp in retirement plans.

As you mentioned, these laid off people were the bread and butter of our tax system.

Thank you for sharing conditions in San Francisco. It's not the sort of thing you read in the newspaper--no sense in panicking anyone is there????

Jim in San Marcos said...

Hi Aim

I don't see the wealth destruction. In the 1930's many banks went out of business and millions of people lost every cent they had.

Right now we are in the midst of a 12 trillion dollar real estate crash. The people walking away from this real estate fiasco lost very little money, if any, in their home investment. Your money in the bank is still there no matter what.

If the banks had really failed and the money was lost, I would agree with you. But the banks will take a 12 trillion dollar loss, call it a robbery. The 12 Trillion paid by the banks for real estate plus the 12 trillion injected to guarantee you deposits pretty much implies 50% inflation.

The original concept of FDIC insurance was to keep people from making runs on their local bank. They wanted their money before the institution went broke. The FDIC guarantee stopped the runs and in effect guaranteed payment of all bad loans.

Also we have the Fed buying up all T-bills presented for redemption in the market before their maturity. This is jury-rigging the Treasury Auctions to reflect unnaturally low interest rates.

If we look at the "perfect storm" 50% decrease in government taxes received, increased transfer payments like unemployment insurance, SS, SSI, Medicare etc, our government failure to pay benefits is no longer out in year 2026, it's next year.

The other thing to worry about, is that 12 trillion that was lost. Probably 80% of it is linked to retirement funds. So far we are in the Madoff mode, cash coming in exceeds cash going out, so there is no problem --- yet.

The only conclusion I can draw, is that nothing really fits logically.

Does that sound reasonable to you?

Anonymous said...

10:37 AM: Inflation and deflation have recently existed at the same time in the US, with import prices deflating and domestic prices increasing. Given this fact*, a move from domestic inflation to domestic hyper-inflation isn't as unfeasible as it might first appear.

Jim, do you agree?
*source: http://themessthatgreenspanmade.blogspot.com/2009/09/tale-of-two-inflations.html

frakrak said...

The government here started their own “stimulus package” a few months before the U.S. began theirs, the effects after a few short months are wearing off at a rapid rate (after spending 14 percent of GDP). Consumer confidence is nose-diving for September, but unlike your own neck of the woods, our housing prices have been soft but resilient. The government has been handing out $21 K to first home buyers for the past few years to stimulate this market. Funding for this will dry up in a few weeks. And most commentators are expecting the bubble to be pricked when this eventuates!

Early government intervention may have distorted the short term track of this depression (2006), then why is it not possible to have inflation and deflation coexisting in the economy? Surreal government intervention equals surreal outcomes?

Jim I can understand governments and economists having a hard job forecasting a few months ahead or a year ahead but they are full of contradictions ….. Honestly what we should wish for are more “one armed economists,” that can’t get away with saying “but on the other hand …..”

Jim in San Marcos said...

Hi Anon 10:37

I read the link, but I see it a tad bit different. I bought (over time) three volt ohm meters from Radio Shack. The first was built in the US, the second in Taiwan and the third in China. You cannot tell them apart.

What we are seeing is the cost of production in this country plus the government red tape have pretty much convince most business men that they can make more money moving their operations overseas.

A complete clothing manufacturer could close down state side and ship all of his machines to Asia and be set up in less than two months. You produce a shirt in China for $2. The neat thing now, you import the shirt into the US as a jobber at $10 and sell it wholesale at $12. You have just avoided tax on $8.

Another thing now entering the fray is currency exchange rates. Once our dollar tanks, it might just be cheaper to produce goods here rather than abroad.

I think what we are really looking at here is 4 dogs pulling on a towel in different directions Label one inflation, one deflation, one the government and the fourth, retirement benefits. The outcome is in question right now. The towel represents our savings for retirement.

The information we are being supplied is like a puzzle where the pieces will fit anywhere. Something is just not quite right.

Jim in San Marcos said...

Hi Frakrak

I didn't realize that the Australian government was offering 21K home rebates. It makes our government look cheap.

You raise an interesting point about economists. They are kind of like a back seat driver. You want to strangle them when they are right.

Any economist that called this back in 2006 would have been labeled a nut and laughed at. The same thing holds true now. The truth is not what the people want to hear, they want hope. As far as the government is concerned, hope doesn't cost much to implement

Anonymous said...

So, starting decades ago... our government, corrupt and greedy government agencies, Wall St., the finance sector, economists, financial engineers (more Wall St.), corrupt and greedy corporations, etc. have now created economic chaos.

This chaos will be composed of inflation, deflation, stagflation, dollar demise, prosperity in certain sectors, lack of prediction, surprises, anomalies, etc. etc. all mixed together into one hell of a storm.

This is what we have to look forward to.

Constant alertness, ability to adapt and take fast action and preparedness seem to be the operative words.

AIM

Jim in San Marcos said...

Hi AIM

No need to panic yet. You made me laugh with your "Constant alertness, ability to adapt and take fast action."

It's the kind of advice I would give to the crickets that I feed to my lizard.

Maybe if we consider lizard "Our Government" and the crickets, "Taxpayers" . . . . . . . you just might be right!

Anonymous said...

Funny analogy.

Some crickets are told when the lizard is coming, however, and know when to jump and how far. For the mass of crickets, however, there is no such warning.

Gone Soon said...

We had a deep gash, but managed to stop the profuse bleeding. We're not healed. We can't even walk right. It will take a while to heal, and the chance of getting an infection is real.

Ten years is a reasonable guestimate. A decade is not a long time in the life of a country, though it is substantial in the life of a human being.

I'll be enjoying life whether I'm rich or poor. It won't be a "lost decade" for me personally. See you guys at the beach!

Poly said...

On this subject, I found the following article very interesting, thought you may like it.

http://www.voxeu.org/index.php?q=node/3421