10/31/08
With four days before the election, this is as good a time as any to take stock of the prospect that America's incipient recession might turn into a depression.
I don't pretend to offer a comprehensive survey here, just some broad brush-strokes on three of the major factors that led up to the Great Depression, and how it compares today.
1. Fiscal and monetary policy. Well, what can we say? Whatever the final outcome, we have a disaster on our hands. Certainly Helicopter Ben, determined to avoid a repeat of the Great Depression he studied so thoroughly, is living up to his nickname — judging by the Fed's balance sheet and the national debt figures. But all that new money he's created isn't circulating — yet. This was what happened in Germany during World War I — the printing presses were cranked up, but people just sat on all that new money until the war was over. Only then did they start to feel confident again and the monetary inflation began to manifest itself in rising prices. So while I won't take a stand on the inflation-deflation argument, it's hard for me to shake one of the inflationist arguments: What might look like deflation right now could very well be a mere slowdown in velocity — ordinary folks sitting on cash because they're scared. Likewise the banks, stuffing cash in a virtual mattress rather than lending it out (at least that portion they're not using for bonuses and acquisitions).
2. Tax policy. Hoover jacked up income taxes from about 25% to 63%. Great way to spur investment, huh? Neither of the presidential candidates is proposing to do anything like that. Sorry, but I can't get jacked up over the redistributionist meme that McCain is trying to stir up against Obama. Unless McCain is proposing a flat tax, and he's not, he's being a hypocrite. Likewise his running mate, who proudly lords over the Alaska Permanent Fund — one of the most socialistic, redistributionst programs created by man. And while Obama's proposed increases won't help matters, they'd be restoring rates on the highest incomes to Clintonian proportions — oppressive for sure, but a far cry from Hoover or FDR. (I'm waiting to hear Obama explicitly say he won't allow the Bush tax cuts to expire for those making less than $250k once we get to the year 2011.)
3. Trade policy. It doesn't look as if a Congress with an even bigger Democratic majority will revive the ghost of Smoot-Hawley. But that could change on a dime, and every so often we get bad omens, like the Chinese company that decided buying 3Com would be more trouble than it was worth.
None of this constitutes a prediction, just a series of observations, food for thought that may or may not have crossed your mind already. Basically what we're all about around here.
Dave Gonigam
Treading a fine line between contrarian thinking and conspiracy theory, Dave Gonigam explores the nexus of finance, politics, and the media for Agora Financial's 5 Minute Forecast. He joined kindred spirits at Agora Financial in 2007 after a 20-year career as an Emmy award-winning writer, producer, and manager in local TV newsrooms nationwide.
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Well my take on the recession/ depression scenario is that no one seems to have a clue what they are doing in the government. The only thing we can count on is that the government will spend more a lot more money.
I think it is a safe bet to say that taxes will go up in the near future as well regardless of what is being said currently. The scariest part (boo!) is that government will somehow find new creative ways to screw things up that we haven’t thought of yet. Happy Halloween!
1. I think you left out the part where post WWI Germany was forced to make war reparations in “bullion” while they were left with only fiat to run their domestic economy. The only people sitting on cash and not spending(lending) are banks. The worst year for Germany, 1923, was in the go-go years for the rest of the world.
Not long ago I glanced at a masters thesis concerning hyper-inflation in the Weimar Repuplic (Post WW I Germany). Apparently, Germany was a relatively wealthy nation with a strong manufacturing base (obviously, it maintained an effective war machine for years). It would have been able to repay war reparations even though they were very high. However, they were not given an appropriate amount of time to do so and in an effort to repay in a timely manner the German government sought to borrow from creditor nations (the way that the U.S. Gov. is doing now), they could not, they just did not have the credentials post WW I to do so and as a result they did not have much choice but to begin printing unbacked cash. Especially after there precious metal reserves were exhausted. This was essentially the main cause of hyper-inflation.
I cannot help but wonder what will happen if the U.S. Gov. loses credibility and can no longer borrow from creditor nations (at least at the current rate of borrowing). Will this Gov. then, finally, reduce spending? If not, will it print unbacked money through the process of Federal Reserve ledger entries? Are there those in Gov. today who believe that eliminating the national debt through hyper-inflation would be a good thing?
Sorry, I have more questions than answers.
A.Q. wonders about US credit status as this unfolds. My concern is that, as trade declines, will any countries be in a position to, or willing to lend anyone anything?
Cheers,
David.
Once the large creditor economies of China, Russia and the Middle East start to hit the wall, they’ll start spending their accumulated dollars to stimulate their economies and forestall political unrest. At first it’ll be done gradually, but as inflation starts to bite, it will probably end up with a race to the bottom to spend their increasingly worthless dollars before anyone else. The dam of stored money will burst causing a flood of inflation. Due to it’s reserve status the dollar could pull other currencies down with it, like a sinking ship sucking down the surrounding flotsam.
Once the large creditor economies of China, Russia and the Middle East start spending their accumulated dollars there will be no need to stimulate demand in USA through public spending. One of the components of the aggregate demand are exports. People that are unemployed or working in the internal sector of the economy will move to the export sector. Nothing else will happen as America at the moment has excess capacity. The problem is that neither China, nor Russia nor the Middle East are expected, at least for the time being, to be able to offset the current fall in the internal demand of the USA. You can and, actually should, print money and spend it when people are stuffing their mattresses with it. To my understanding you cannot expect an inflationary process to start when the aggregate demand falls bellow the aggregate supply. It has to be the other way around.
The danger from public debt in the USA is not from the stock of debt amassed, but from illiquidity. Because people in the USA are not saving foreign creditors may, specially in a panic situation, experience great difficulty in finding buyers for their bonds the first step to be taking in the repatriation of their funds.
Besides that, of course, there is also the danger that the monetary authorities of their respective counties may stop pegging their currencies to the USA dollar. Something that, probably, it will not be a bad idea.
It seems to me that there is a lot of scaremongering going on.
The post in my name (above) is not me.
There’s always some schmuck trying to work some asinine agenda… That’s how you ruin a board like this one – grow up and get a life!
I Agree, that is the way the crisis will unfold. We’ve seen the building blocks of the coming crisis already, this episode this fall was a gift in that it allowed us to understand more about the future. Government debt will begin to be seen as subprime, it will become illiquid and the government won’t be able to find new buyers (treasury bond investors), the market for government debt will freeze up, bond prices will collapse and look like junk. But the feds will have to fund the government somehow. Leviathan isn’t so week that he’ll just collapse because he can’t sell bonds to rack up more debt. He’ll start manifacturing more and more currency to fund himself. The logic of the situation will dictate his actions. But what will be the effect of all this currency generation ? Obviously monetary inflation, but … he’s still tricky and may have ways to mask it for awhile. Still thinking that one through.
Peter,
Your theory that unemployed Americans will move to the export sector is interesting, but it begs a question. What do you think we are going to export?
The manufacturing base in the US has been so savaged by off shoring that all we make in this country are the things that we can’t import do to size limitations like single family houses and shopping malls. We have even gone so far as move our intellectual work like software and medical development off shore. Even our food production is done by guest workers and undocumented aliens.
Simply put, your theory doesn’t hold water because we make nothing the rest of the world can’t make ( better and cheaper ) themselves.