SLL will be on vacation 5/17-5/21 and will not be posting. Posting will resume 5/22.
Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression.
If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Federal Reserve Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly. Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t).
If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.
Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.
Let’s look at those stock indices. They are measured in fiat debt units, the entirely elastic quantity of which is in the hands of governments and central banks. What if stock indices are valued in a less ephemeral currency, say gold, aka “real money”? By that measure, the DJIA divided by the price of an ounce of gold reached its all-time high of about 41 ounces in May 1999, or just before the depression began. That ratio collapsed to under 7 ounces in September 2011, and currently stands at about 14. If you paid for the Dow in 1999 with gold, you’ve lost 65 percent on your original investment.
There is a general awareness that real family incomes have gone nowhere since the turn of the century; it’s often offered as a reason for the Trump and Sanders ascendancies. Other, less well-known indicators have also deteriorated or declined. What David Stockman defines as “breadwinner” jobs in construction, manufacturing, white-collar professions, governments, and full-time private services, which on average pay more than $50,000 per year, peaked in January 2001 and are still about 3 percent below that peak. The growth in employment since 2001 has been in lower paying part-time jobs, restaurants, retail, medical services, and education, which explains the stagnation in incomes. Two other important measures—labor hour inputs and real net investment—have gone nowhere since 2001. An economy in which hours worked and real investment are not growing is an economy that is not growing.
The US economy has been losing altitude for sixteen years. While debt monetization and interest rate suppression have fueled housing and equity booms, they can’t mask the underlying deterioration. President Obama will be the first president to have presided over an economy that never achieves 3 percent annual growth. That’s by government figures, which must be taken with a shaker of salt. Employment statistics are especially dubious. To the public, they are right behind the stock market as an economic indicator. They are subject to a variety of pertinent criticisms, including their seasonal adjustments and the birth-death model of new business formation, which continues to add to employment although, sadly, more businesses are currently dying than are being born. The government also has a vested interest in understating inflation. Many of the benefits it pays are indexed to inflation, and interest rates on government debt incorporate an inflation premium. Understating inflation overstates the growth of real GDP, probably third on the list of statistics to which the public pays attention.
The Great Depression was not a straight downhill run. There were multiple, widely hailed “recoveries” and stock market rallies, but in 1938 the economy was in worse shape than when Franklin Roosevelt was elected in 1932, and the government was bigger, more intrusive, and more in debt (the same can be said about the government since 2000). Depressing it is to contemplate how government turning a recession into the Great Depression, but consideration of what Japan has done since its stock market topped out in 1989 can leave one pondering the choice of pills, noose, or handgun.
The Japanese have copied every page of the Keynesian and monetarist playbooks: government debt, public works spending, and regulatory expansion, and central bank monetization of assets and interest rate suppression. Multiple recoveries have been punctuated by multiple contractions. Capitalism has remarkable recuperative powers, but screw with an economy long enough and you not only prevent recuperation, you do lasting damage. Japan and Europe—also beset by persistent economic idiocy—have shown little growth or innovation for decades, leaving the economic idiots responsible muttering about supposed, self-exculpatory, secular stagnation. As the US economy glide paths into zero-and-below land, Washington, Wall Street, and the Ivy League’s best are muttering the same thing.
Nothing is more telling than birthrates, and in Europe, Japan, and the US, birthrates are below the replacement rate of 2.1 births per couple. When planned, having babies expresses confidence in the future. The Japanese buy more adult than baby diapers, illustrating the demographic crunch and falling dependency ratios (the ratio of able-bodied and employed workers to the population requiring outside support), which understandably increases pessimism and further decreases birth rates among the young.
They see a bleak future and they’re not wrong. The global economy hit stall speed with the commodities crash in 2014 and another rendezvous with terra firma looms. Never has the world been more in debt. True recovery won’t happen until most of it has been repudiated and written off. The current depression is already longer than the Great Depression. By the time it’s over, economic historians will be calling it the Humongous Depression.
This is Crisis Progress Report 18. For the first 17, see the Debtonomics Archive.
HARKENS BACK TO A TIME WHEN PEOPLE READ FOR PLEASURE