So What was so great about the Great Depression?

[kurt_cagle]

The 1930s depression occurred for much the same reason that this one is about to - the velocity of money has stopped. The Fed can try as many bailouts as possible, BushCo can try to stimulate the economy until the cows come home, Bernanke can drop rates through the floor, and nothing is going to happen.

I realized earlier that the best analogy I can think of here is that the country has been gorging on high calorie, high cholestoral treats (derivatives, no-fee mortgages, credit cards out the wazoo, cheap HELOCs) for the last twenty-odd years, with most of it going on in the last eight or so. This stuff forms plaque - assets with dubious actual value that end up clogging up the arteries and reducing monetary flow. Today, we just witnessed the start of a cardiac infarction - a heart attack. The heart has seized up, after multiple minor seizures, blood pressure (credit availability) is dropping dramatically, and vital signs (like the stock market) are suddenly plummeting.

Frankly, I don't think the prognosis of the patient is that good. You can argue the morality of economy until you're blue in the face, but the reality is the economy as it exists is the one in which most of us know how to operate. Frankly, I couldn't care less about the CEOs and morale outrage - they're parasites on the body politic that should eventually be excised, but any economy that is this diseased tends to develop parasites because the immune system (the regulatory system) has been compromised.

Getting off that metaphor for a second, most people know the Great Depression only on the basis of pictures and the first movies, and maybe a few people have read up on it. The Depression occurred in part because one industry (in this case the stock market, where banks were heavily invested at the time) became broken, and it was likely exacerbated because of the practice of giving dividends, but the upshot of it was simple - people couldn't get money. Unemployment skyrocketed, and natural disasters became much harsher because there were few means to help people get through them.

What differs this time around is that banks in the Depression were mostly local, so the effects were localized as well - and the banks in general held a much smaller role in people's lives than they do now. Banks provide lines of credit to smooth out irregularities in business income, making it much easier to keep payroll and leases paid. This means that people can "bank" upon the notion that they will have a regular paycheck, and can make longer term plans, including the purchase of goods and services that otherwise would be beyond their immediate ability to purchase.

That's all about to go away. I know what kind of life that you end up living in that particular circumstance. I'm a technical writer and editor by profession, though I also have a side income as a software consultant. During the Tech Recession (aka the Nuclear Winter, for those of us who actually went through it), I had to borrow extensively in order to keep food on the table when several of my publishers failed and I couldn't get work consulting. My credit rating collapsed as I couldn't pay things off, and for about two years I went through hell with debt collectors until I finally was able to pay everything off - which also meant that for all intents and purposes, even with a near six figure income, I was functionally broke.

The economy went through its false recovery, and I finally managed to get back on my feet, but did so with my credit rating in tatters. What that means is that everything I do now is via cash. I rent my house, because I was watching all of this going on in the background and was reasonably certain that it would end badly, and because I have a family that meant that I was looking at a minimum of $500K or more for that house. I had to pay cash for my car (about $10,000 all at once), and have been paying cash for new furniture and the like as the money comes in. I have one secured credit card which I'm scrupulous about paying off every month, and only use it in those situations where I can't get by with cash (hotels and rental cars, for instance).

It's not a fun existence. Even though my cash flow is pretty good, it means that the only way I can get something is to save up for it, and it means that I'm working 2-3 jobs in order for that to happen. Yet it will likely be the norm soon enough, especially as business lines of credit freeze up and the unemployment numbers start to climb.

What's going to happen now is that banks are going to have to do the hard part and liquidate what they have at bargain basement prices. A lot of them will go out of business - and I suspect not a few of them are going to be behemoths, like CitiGroup or BofA, each of which are taking on so many failing companies that their total debts will likely swamp the good debts they hold on the books. When that happens, prices will fall, demand will fall, businesses will fail, wages will fall, housing prices will continue in free fall, and the amount of available green and peach money that's printed in Philadelphia or Denver will dry up.

Of course, this means that this is the end of inflation, though this won't be apparent for awhile. When money is produced in excess of demand, its value drops. That's been the preferred course of action for the last eight years (and in reality the last sixty). You can try to shock the economy to get it jump-started, but this only works when people aren't trying to save every penny of that money because they don't trust the government, or when they're paying it into large corporations (oil companies, agribusiness, Walmart) that then redistribute that money to the wealthiest 0.1% (many of whom are located thousands of miles from where the money is spent).

Frankly, in the long term, the only thing that's going to get us out of the present crisis is a massive restructuring of corporate law significantly restricting the ability of corporations in almost every sphere, the development of a local corporation infrastructure that push money back into their communities (though I think that the notion of what constitutes a community also needs to be changed), the creation of distributed businesses with strong limits on the ability for such businesses (especially financial ones) to consolidate, and the elimination of the cults of personalities which currently exist in our business world. For that to happen, however, there's going to have to be a late of creative destruction taking place, and in my experience, those that most heavily preach the gospel of "Free Market Capitalism" tend to ignore the fact that such capitalism can often times be brutal.

[TechBear_Seattle]

1. I think you hit on a brilliantly accurate analogy

I shared it with the CEO of the brokerage firm for which I work (small company; his office is next to the IT department where I work.) He rolled his eyes and said that, to continue the analogy, the Administration wanted to force-feed the patient on deep fried pork rather than perform emergency bypass and instruct him firmly to quit smoking and start eating sensibly.