It was just last month that I wrote a column about my general optimism. It may seem odd this time to warn against trends that seem eerily similar to those that lead in one case to stagflation (stagnant growth in the midst of inflation) and in another case to the Great Depression, THE global financial calamity of modern times. I am still optimistic, but my optimism is about our future progress and ability to correct our mistakes. It starts with recognition of the task ahead, and that is only possible with a full understanding of where we are. It is about being hopeful that we are reaching a point where we seem to have the tools to deal with these problems, and perhaps soon the leadership to create some action.
In saying this, I am quite certain that our immediate financial future is very troubling. I am further certain that IF we don’t change policies that lead us here, we are in woeful shape and could indeed be headed for a major global financial meltdown. I have been thinking a lot about our policies and direction and the troubling parallels that exist in American history. None of them are good.
The most recent end of the world as we know it occurred on Friday July 11, 2008. This was the day they said the world would end, Fannie and Freddie would be put in receivership over the weekend, the general practice of buying property and lending money for the property would be forever changed, the planets would no longer function in correct accordance with orbits and so forth. Of course Monday came, and people bought houses, locked loans, did home inspections, and life pretty much continued.
Lost in all the panic regarding Fannie Mae and Freddie Mac, the most recent tabloid financial, were some very troubling numbers regarding inflation that also came out on Friday the 11th. Import prices rose 20.5%, the most on record since they began charting this factor back in 1982. The University of Michigan consumer sentiment report contained a nugget that suggested that consumers predict an annual inflation rate of 5%, over double what it is today. Further, evidence from the July 15, 2008 CPI Report (Consumer Price Index) shows inflation rising at a pace higher than we’ve had in 26 years.
And along comes Ben Bernanke to announce to us that inflation is a problem.
If I had to draw an analogy it would be this.
A man spots a pack of matches lying in the middle of the street. Recognizing that this potentially dangerous item is just lying there, where any youngster could come along and play with it, potentially causing themselves or others harm, he leaps into action.
He grabs the matches so they are out of the reach of any stray children. Spying an old wooden shed adjacent to City Hall and the local children’s hospital, he places it in the middle of the wooden floor and surrounds it with furniture, which he douses with gasoline, and leaves the building. Then just to make sure no one would harm themselves by playing with those matches he grabs his trusty flamethrower and torches the shed from across the street.
As the fire leaps to City Hall and the Children’s Hospital, he calmly sips the last of his coffee, and walks purposefully over to a nearby convenience store where he buys a WHOLE CASE of Natural Spring Water.
With heroism and fortitude, he calmly, but decidedly, walks back to the scene of the shed only to find that indeed, the fire has spread a little bit to the adjacent schools, homes, businesses, and what not.
Not panicking, he realizes he is going to need more water. This time, really thinking things out, he gets into his Humvee, and drives the 94 feet to the convenience store where he patiently, but assertively buys 10 CASES, (can you believe it? TEN!) of Natural Spring Water, including 2 of the good ones, because he bought them out of all of the cheap stuff.
Honorably but humbly, he drives the 94 feet back to the front of the burning embers of the shed next to the ashes and charred remains of the entire town, immediately adjacent to the fireworks factory and old growth forest. He rationally but sincerely pours the 240 bottles of Natural Spring Water at the outer edges of the fire, and realizes with amazing clarity…
“I need to alert the public.”
This staggering display of poor recognition is the sort of thing that exactly did lead to the Great Depression, stagflation, and a host of ills as long as your arm. On the other hand, to have him start to point out that inflation is a real problem is at least progress. Perhaps, once the actual balance sheets are examined, it will also be determined that the Federal Reserve can really only be the “lender of last resort”, as they are intended, because in effect, it has nothing to lend. The end of that comes when the Social Security Administration actually needs the money that the Federal Reserve is spending. You know, like when all of those baby boomers start retiring….or didn’t you know that the largest owner of U.S. Treasury debt is the Social Security Agency. Yup. The Social Security Trust Fund only works because there is an excess created in taxes collected against benefits paid. This changes dramatically as the system starts this year to absorb an additional 73 million retiring boomers, or roughly a quarter of our total population.
Bernanke is responsible for a period of extremely aggressive rate lowering during an alarming rise in the price of energy, food, commodities and raw materials and against a dollar that currently is at record lows against the Euro. Since the Fed’s primary role is to safeguard against inflation and lowering rates is inherently inflationary, the chutzpah necessary to reposition his own place in history as the one warning us against inflation would normally be staggering.
(An aside: Normally the hubris of Bernanke’s latest commentary would be staggering, but this is a world where a presidential administration’s secret energy policy has lead to the highest profits ever for energy companies. As higher energy costs cuts into everyone’s budget, leading to worse and worse inflation, higher and higher unemployment, and a growing population of the most desperate, this administration’s solution is to create “energy independence” by allowing the same energy companies the right to drill in protected lands, while they ignore millions of acres of leased area they already have. This oil won’t be available to affect problems for an estimated 7 years. Further, it does nothing regarding the industry-created bottle neck due to refining and shipping capacity. Lastly, while the argument is made that the creation of a fully domestic supply is the reason for this drilling in order to better to control, it should be noted that the natural gas supply is fully domestic, and yet each year we are greeted with gas price increases that are “larger than normal”, until that is the normal. – Okay…done.)
Now, after dumping on Bernanke for a bit, as he is due, it is also important to remember that our current predicament and its possible outcomes is like any other modern disaster. It isn’t any one thing. It is a confluence of things. To that end, we should be extremely concerned if we continue to ignore the certainty of our path. The purpose of contrasting today’s problems against the Great Depression should primarily be to prevent things from further deteriorating and not doing the things that are akin to protecting the general public from matches with flamethrowers.
If the captain of the Titanic hadn’t ordered most of the lifeboats removed because he believed the ship to be impervious to all concerns, if the rivets hadn’t failed, if the sheet metal hadn’t been inadequately thin, and on and on. The point is less who is to blame, than what happened, but the purpose of finding out what happened is to prevent it from happening again in the first place, or to prevent its re-occurrence. The simpler idea is that history repeats itself and that we are doomed to repeat what we forget to remember.
Consider the major accepted causes for the Great Depression. People have written books on this stuff, so it is hard to let it all out in an article, but there are certain theories that either contribute to the result, or are blamed in totality for the darkest days in our nation’s history and an event that was literally a global financial calamity. To keep it easy, I made a checklist of at least a few of the reasons commonly cited as contributory towards the great depression:
Debt – Seen as one of the causes of the Great Depression was a cycle of growth spurred by the massive extension of credit to consumers and businesses, which created an apparent boom of short-term growth, at the cost of the debt. As the cost of the debt became too great, consumers and businesses began defaulting on the debt.
Check.
Bank failure – Banks in turn began failing as their debtors defaulted and no one could break out because while the value of goods had fallen massively, the debt had not.
Hmmm. Check.
Big Business –Franklin D. Roosevelt won the election in 1932 largely by offering American’s a New Deal. He put the blame for the Great Depression largely at the feet of ineffective governance and the excesses and unfairness of big business.
Uh. Yeah. Check.
Inequity of Wealth
Check
Decline in American Exports
Double Check (the volume may be higher with inflation and higher commodity prices, but the trade deficit is actually growing faster because of the amount of oil we import)
Reduction in purchasing goods
Check
Mismanagement of the money supply
Quadruple bypass check
On balance, this isn’t really good, is it?
OK, so let’s look at the period of 1973 to 1982 during which the United States economy was marked by a period of Stagflation. This is when growth is stagnant but prices are higher. The most notable period of Stagflation in recent history began with the oil embargo of 1973 from Middle East oil producing nations. It’s apex was marked by the Iranian revolution of 1979 and it is precisely the high unemployment rate, high energy and goods costs, weak U.S. dollar and instability in the Mideast that lead to dissatisfaction with President Carter and ushered in the “Reagan Revolution”. OK so here we go:
High energy prices.
Check
President with below 40 % approval rating
Check
Marginal growth, followed by recession.
In process.
Instability in Middle East
Check.
Government printing money and exercising price controls.
Yeah, definitely check.
Adverse supply shock (like when a commodity, say oil, has a drastic spike and causes a subsequent major change in the cost of goods across the supply chain.
Hmmmm, yeah, well, check.
Growing unemployment.
Check.
Hmmmmm.
0kay, so what is the point? The point is that the present situation is severe. It isn’t hopeless if we act with sound policies, but what would the consequences be if the wrong moves are made, or the problems are ignored? We need badly to recognize it. It is somewhat amusing listening to how “UNLIKE” the Depression or Stagflation we are today, and that is a lot of what I hear in the news. The problem is that they are taking a picture of today against the worst of the times in question, not at the steps that lead to them. No one is dumb enough (except Rush Limbaugh) to believe that the Stock Market crash is the cause of the Great Depression, as if it in and of itself was divined out of thin air. Similarly, you can’t look at the center of the wreck and say it doesn’t look like today.
Again, I end with a message of optimism, because I believe that the climate is right. People aren’t buying it anymore, and if that happens, than we can face the problems in front of us with fortitude. I believe that looking at history; it will show that FDR was right about a lot of things. His initiatives helped create a stable economy and his policies and departments forever changed America and moved the nation out of our darkest time. It seems that there are some thematically desperate similarities between today and our nation’s darkest hours, but there are some positive similarities as well, and perhaps just as FDRs New Deal helped heal America, we will get a new, New Deal soon.
In the interim…
The sun will rise tomorrow. The markets will open on Monday. The process of buying and selling homes will continue on Tuesday. Someone will qualify for a mortgage on Wednesday. Life will continue. The world’s history is always being written, but when you lack confidence in some parts, you can have confidence in others.
If you make sustainable decisions throughout, you’ve done your part, and improved your own life in concert.
