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Injin

Why The Present Depression Will Be Deeper Than The Great Crash Of 1929

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http://www.oftwominds.com/blogjune09/depression06-09.html

Continuing our analysis of The Great Crash of 1929 by John Kenneth Galbraith: by understanding the causes of the Great Depression as elucidated by Galbraith, we can observe the differences between the present and 1929. These reveal why today's Depression will be even deeper than the 1929-1941 one and why today's policy "fixes" as pursued by that great student of Depression, Ben Bernanke, are fighting the last war--a Keynesian stimulus strategy doomed to catastrophic failure.

I hesitate to call this topic "important" because such announcements instantly cut my readership in half. Thus I am inclined to call this topic "edgy," "explosive" and "contrarian," all of which sound more interesting than "important" (yawn).

Galbraith begins his exploration of causes by noting that "economics does not allow final answers on these matters. But, as usual, something can be said."

First, he demolishes the notion that abundant credit caused a speculative orgy.

The long-accepted explanation that credit was easy and so people were impelled to borrow money to buy common stocks on margin is obviously nonsense. (page 169) On numerous occasions before and since credit has been easy, and there has been no speculation whatever. Furthermore, much of the 1928 and 1929 speculation occured on money borrowed at interest rates which would have been considered especially astringent.

Far more important that rate of interest and supply of the credit is the mood. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich. (emphasis added, CHS)

Next, Galbraith looks to the wellspring of credit which has been virtually nonexistent in our current speculative boom: savings. (Or at least domestic i.e. U.S. savings.)

Savings must also be plentiful. If savings are growing rapidly, people will place a lower marginal value on their accumulation; they will be willing to risk some of it against the prospect of a greatly enhanced return.

Speculative excess is somewhat self-regulating--or should be unless manipulated by the very state which is pledged to protect the economy from such excesses. Galbraith notes:

Finally, a speculative outbreak has a greater or less immunizing effect. The ensuing collapse automatically destroys the very mood speculation requires.

Moving from the causes of speculative excess to that of Depression, Galbraith rejects a cyclical cause: "No inevitable rhythm required the collapse and stagnation of 1930-1940."

..............

So then what did trigger the Great Depression? Galbraith sets aside the speculative collapse itself for a moment and digs for problems in the real economy. He begins by noting worker productivity rose by 43% between 1919 and 1929 even as wages, salaries and prices all remained comparatively stable. This enabled increasing profits, which due to the large income disparities of the era, flowed largely to the well-to-do.

What did the wealthy do with this new-found capital?

A large and increasing investment in capital goods was a principal device by which the profits were spent. (page 175) It follows that anything that interrupted the investment outlays--anything, indeed, which kept them from showing the neessary rate of increase--could cause trouble.

The effect, therefore of insufficient investment--investment that failed to keep pace with the steady increase in profits--could be falling total demand reflected in turn in falling orders and output.

As I understand this, the proximate cause was a vast income disparity which placed much of the prosperous era's profits in the hands of a small wealthy class, who then mal-invested the profits. If that isn't ringing some bells in your head, then please recall that income disparity, which fell from 1946-1970 or so, has been rising ever since. Bingo--profits flowed increasingly into the hands of a elite wealthy class who then squandered/mal-invested the vast profits, undermining the entire economy.

...............................

But the present is far more fragile and vulnerable than the U.S. economy of 1929, for the following reasons. In 1955 Galbraith could not possibly have foreseen or anticipated these current conditions:

1. A Federal government which since the "Reagan Revolution" of 1981 (e.g. don't tax and spend, just borrow and spend) has borrowed during so-called good times on a scale once reserved for rare Keynesian stimulus to combat serious recession. Thus we find ourselves at unprecedented levels of debt (comparable in terms of GDP to the entire cost of World War II) and our current Depression has barely begun.

2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight.

3. A banking sector of such debauchery and fraud that the excesses of the 1920s are reduced to the pranks of slighty-naughty choirboys and girls.

4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations.

5. A global military hegemony which costs more than all the other militarys and intelligence operations of the entire world put together. The U.S. military consumes more oil than the nation of Sweden (9 million residents).

6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the U.S. squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford: "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable

7. A paucity of U.S. savings (and thus of domestic capital) with only one historical parallel: the depths of the Great Depression when unemployment was 25%.

8. A huge reliance on financial leverage, debt, borrowing and trickery for corporate profits; the U.S. exports soybeans, increasingly worthless dollars and "financial innovations" which are now exploding in economies from Ireland to India with the destructive force of superweapons. In exchange for this dubious paper, we have accepted actual tangible goods from the rest of the world.

They are now slowly waking up to the fact they've been conned on a scale few can grasp.

9. Globalization has reworked the global supply chain in an astonishingly brief period of time. As a result, the arbitrage of currencies (foreign exchange a.k.a. forex), wages, governance (less is more profitable) and environmental regulations (zero is the most profitable) have all placed advanced post-industrial economies like the U.S. at great structural disadvantages.

10. The U.S. claims to be competitive but much of this competitiveness is highly selective and thus illusory. Everything in the U.S.--labor, goods, buildings and taxes--is high-cost, overregulated (except for finance, banking and governance) and vulnerable to unpredictable lawsuits and officially sanctioned looting. Other than recent immigrants, non-U.S. employers find the workforce is often surly, unappreciative, narcissistic, entitlement-obsessed, unhealthy, poorly educated, unmotivated and more inclined to get-rich-quick schemes than actual enterprise or productivity.

more at link - LOTS more

Basically, this piece is the whole thing nailed.

Edited by Injin

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5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above: declining dollar, rising income disparity, and wages falling due to global wage arbitrage) then they turn more and more to borrowing and ever greater debt to fund what they have been brainwashed by the media to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc.

The only other mechanism available to the middle class to increase household income is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences which are still unfolding.

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SAVINGS WAS / IS PLENTIFUL... in China

But it in no way underpins the level of gearing (in the form of derivatives and securitised debt) in the West that went a long way to fund that wealth and savings.

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Guest happy?

...But the present is far more fragile and vulnerable than the U.S. economy of 1929, for the following reasons. In 1955 Galbraith could not possibly have foreseen or anticipated these current conditions:

2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight.

Galbraith repeatedly makes exactly this point about the 1929 crash. Everyone knew that the market was overheating in 1928 no-one wanted to step in at federal level and take the can for its collapse - they consequently waited another year!

To say this is a feature unique to now strains credibility beyond breaking point.

3. A banking sector of such debauchery and fraud that the excesses of the 1920s are reduced to the pranks of slighty-naughty choirboys and girls.

Drivel - Galbraith (as anyone who's read the book knows) cited over and over again the fact that the bankers were corrupt and manipulating the market. Indeed one of the reasons Joseph Kennedy would never get anywhere in politics was because his behaviour was so well known.

4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations.

Clearly the author's hobbyhorse - listen to this twaddle and you'd be back to soup kitchens in no time flat.

5. A global military hegemony which costs more than all the other militarys and intelligence operations of the entire world put together. The U.S. military consumes more oil than the nation of Sweden (9 million residents).

Echoes of thirties isolationism all over again - seems some Americans never learn.

6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the U.S. squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford: "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable.

And in what way is this unique to the present - the author previously made the point about an economic elite which mis-directs investments and then uses the same evidence to cite how it's different now. A shoddy analysis at best and at worst merely self-contradictory.

I prefer Galbraith rather than a shallow mis-reading.

Still relevant - get yours here:

http://www.bookbrain.co.uk/pricesearch.aspx?isbn=0140136096

Added:

So annoyed by this shallow nonsense I re-read Galbraith on the causes. Paraphrased:

The economy was fundamentally unsound... Many things were wrong but five weaknesses seem to have had an especially intimate bearing...

1. The bad distribution of income. [i.e. a lop-sided economy]

2. The bad corporate structure [Galbraith talks of "promoters, grafters, swindlers, impostors and frauds"].

3. The bad banking structure [an inherently weak structure which led to a domino effect of closures] QE anyone?

4. The dubious state of the foreign balance [America had too many debtors - the reverse of now!].

5. The poor state of Economic Intelligence. Read the sections on the negative effect of a balanced budget and fear of inflation - Galbraith is no friend of the majority of people who post on this site!

pp 194 -201 Penguin Edition.

If mis-interpreting Galbraith is the new economics seems like you've found your man.

Edited by happy?

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so you think it's fine for the US to still have troops garrisoned in Japan even though the war ended 65 years ago?

US needs a smaller military that protects only it's own borders along with stopping the useless war on drugs , how many billions will it save by doing that?

They are broke , they need to cut back , end of.

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so you think it's fine for the US to still have troops garrisoned in Japan even though the war ended 65 years ago?

US needs a smaller military that protects only it's own borders along with stopping the useless war on drugs , how many billions will it save by doing that?

They are broke , they need to cut back , end of.

"End of" closed phrase for a closed mind. Apposite.

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thanks for 'debunking' my points :rolleyes:

whether they maintain their military bulge or not they will go bankrupt and when they go bankrupt they will not be able to have bases everywhere

it is inevitable

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http://www.oftwominds.com/blogjune09/depression06-09.html

Basically, this piece is the whole thing nailed.

of course in percentage terms peoples standard of living in the USA and most of the west will fall more than the 1930's

just look at the debt

and this time the US has no savings, is not the world leader in productive capacity and has the welfare state to support

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....

So annoyed by this shallow nonsense I re-read Galbraith on the causes. Paraphrased:

The economy was fundamentally unsound... Many things were wrong but five weaknesses seem to have had an especially intimate bearing...

1. The bad distribution of income. [i.e. a lop-sided economy]

2. The bad corporate structure [Galbraith talks of "promoters, grafters, swindlers, impostors and frauds"].

3. The bad banking structure [an inherently weak structure which led to a domino effect of closures] QE anyone?

4. The dubious state of the foreign balance [America had too many debtors - the reverse of now!].

5. The poor state of Economic Intelligence. Read the sections on the negative effect of a balanced budget and fear of inflation - Galbraith is no friend of the majority of people who post on this site!

pp 194 -201 Penguin Edition.

If mis-interpreting Galbraith is the new economics seems like you've found your man.

Thanks. Great post. I too read Galbriath's book over this winter and felt that the article linked to above was missing the mark somewhat.

That's the problem with t'internet; it's too easy to self-publish rubbish masquerading as erudite thinking.

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I dunno - I think CH Smith is right in his analysis of what is wrong with the US. Whether or not that totally corresponds with Galbraith on the Depression is a more moot point.

But the fact is that the US is a substantially different country now - fewer remaining natural resources, a larger and more burdensome military, a negative balance of payments, a more dissipated population with a greater sense of entitlement (and more advanced personal weapons) etc.

Can't see things working out well for it, tbh.....

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