How Will This Depression Differ from Previous Ones?

Here are excerpts from commentaries recently posted at www.speculative-investor.com.

Clarifying our depression forecast

Although we are anticipating another great depression, we want to emphasise that we are NOT anticipating a replay of the 1930s. We are anticipating a drawn-out period of economic contraction, but the details will almost certainly differ markedly from previous depressions.

One of the most important differences between the coming -- actually, "current" is a more appropriate word since it has probably already begun -- great depression and the 1930-1945 episode is that today's version is likely to be inflationary. An inflationary depression is potentially worse because the inflation (money-supply growth) leads to more mal-investment (more wasted savings) and higher living costs relative to incomes.

Another difference is that the government of today will provide a more extensive 'safety net' for people who fall on hard times. Paradoxically, this could lead to even greater economic weakness than occurred during the 1930s. The reason is that the government pays for the safety net with money that would otherwise have been used in productive endeavours.

On a related matter, the government could all but eliminate unemployment during a depression by giving every unemployed person a government job, which is effectively how the Soviet Union eliminated unemployment (that, and by sending millions of people to forced labour camps). Such a massive expansion of government is our greatest fear because it would make the depression permanent.

Lastly, thanks to the technological advances that have occurred over the past 70 years, today's economy is structured very differently to that of the 1930s. However, we don't think this will have a significant bearing on whether our grim economic forecast comes to pass. People in semi-capitalist countries naturally view the present day as the "modern era" and the distant past as a more technologically backward era, but in doing so they often fail to appreciate that the people in the now seemingly backward era viewed the situation in exactly the same way. For example, due to the rapid advances in technology and manufacturing productivity that occurred during the first three decades of the Twentieth Century, many people in 1930 argued that things couldn't possibly get as bad as they were in the 1870s, or even as bad as they were in 1920-1921. We now know that things got much worse, despite the great technological progress that had been made and the associated structural changes that had occurred in the interim.

The fact is that throughout history, the bursting of an all-encompassing credit bubble has ALWAYS been followed by a very severe economic downturn, regardless of the economy's structure at the time. This is why credit bubbles must be avoided. Government attempts to 'soften the blow' during the 1930s turned a severe economic downturn into a 15-year depression, and the governments of today are making the same mistakes.

"Inflating away" the debt

Based on emails we have received, a fairly common view seems to be that the government will "inflate away" its own debt problem as well as the problems of debt-ridden private-sector consumers. Our view is that the government will TRY to do this, but as is typically the case it won't work as planned/expected.

Let's think this through. Monetary inflation causes a NON-uniform increase in prices throughout the economy, so someone can only benefit from inflation if his/her income and assets are amongst the INITIAL prices to rise in response to the inflation. For example, a steel worker with an uncomfortably large home mortgage will only benefit from monetary inflation if the inflation causes wages in the steel industry and the prices of homes in his location to rise faster than interest rates and living expenses. However, the opposite is more likely to occur. The excess supply of homes relative to genuine/sustainable demand and the excess capacity in the steel industry that resulted from the preceding boom will probably keep lids on home prices and steel-industry wages for a long time to come.

The average person is rarely helped by inflation because he/she is usually near the end of the line when it comes to the so-called 'positive' effects of inflation. Furthermore, in the current economic environment there is even less chance than usual that the average person will be a beneficiary of monetary inflation, and an even greater chance than usual that he or she will be hurt by monetary inflation, because the inflation will likely increase living and debt-servicing costs relative to incomes and will very likely do little to support home prices (at least initially). Only those average folk who have substantial exposure to gold-related investments stand a good chance of coming out ahead.

It is always the case that the biggest beneficiaries of inflation are the entities that get the new money first. Therefore, the biggest beneficiaries are usually the government, the banks, and large speculators. And as far as the next few years are concerned, it is likely that the government will be the biggest beneficiary by a huge margin. This is because the government can borrow in terms of its own currency without giving any consideration to how the loans will ever be repaid, thus allowing it to grow rapidly at the expense of the private sector. Note, though, that the government can never actually "inflate away" its debt; rather, each new dollar that gets borrowed into existence necessarily results in a liability in excess of one dollar due to the obligation to pay interest. In other words, the debt always grows faster than the money supply. It is therefore a good bet that the quantity of debt will continue to expand until the entire monetary system collapses.

In summary, under the current monetary system the debt can never be "inflated away" because inflation occurs via the creation of additional debt. Furthermore, the people and organisations that benefit from the inflation, at least in the short run, are those that get the new money first. In the long run nobody wins, but if you are a Keynesian you don't care because in the long run we are all dead anyway.

Comments

[Xorthfred:]

I am not going to throw rocks at the inflationists or the deflationists because I feel that they could both be correct with the key variable being the timing of the advance or decline in the money supply. First comes the deflation, which would normally run its course over some indeterminable amount of time. However, the FED and fiscal policy are pushing the monetary base and velocity, thus counteracting the deflation. Milton Friedman's studies indicated that inflation follows quantitative easing by app. nine months.

Monetary easing began on Sept. 27, 2008. There was virtually no increase in the monetary based over the previous 12 months. I invite you all to do the math. The current deflation is partially the consequence of tight money from Sept. 2007 to Sept. 2008.

Mar 03 10:59 AM

[Chris of NH:]

I concur really... I feel deflation is a short term phenomenon and that hyperinflation will rule the day long term



On Mar 03 10:59 AM Xorthfred wrote:

> I am not going to throw rocks at the inflationists or the deflationists
> because I feel that they could both be correct with the key variable
> being the timing of the advance or decline in the money supply. First
> comes the deflation, which would normally run its course over some
> indeterminable amount of time. However, the FED and fiscal policy
> are pushing the monetary base and velocity, thus counteracting the
> deflation. Milton Friedman's studies indicated that inflation follows
> quantitative easing by app. nine months.
>
> Monetary easing began on Sept. 27, 2008. There was virtually no
> increase in the monetary based over the previous 12 months. I invite
> you all to do the math. The current deflation is partially the consequence
> of tight money from Sept. 2007 to Sept. 2008.
>

Mar 03 11:03 AM

[Leftfield:]

What I've read about compound interest suggests that somewhere in that and fractional reserve lies unsustainability. We also have the propping up of powerful interests that should fail to an extent I didn't forsee. Shows to me how we've fallen that we throw so much good money after bad.

Average people are barely making it, maybe, and will agree to any solution that seems to forstall immediate pain. The powers that be are engorging themselves in the name of "solution" and we will hear that it would have been worse without the bailouts etc. soon enough.

Too bad principle has apparently disappeared from this society. If any freedom of thought still exists, our descendants will likely curse us.

By the way, technological change was greater before the last depressions. The railroad and telegraph in the 1870's were far more revolutionary than the internet is. They replaced the pony express.

My grandparents were born before electricity, cars, telephone, airplanes and radio. They were not long established before the 1930's.

Thanks for the article.

Mar 03 11:19 AM

[boats:]

I suggest that principle has never existed in America. Colonists killed off most of the indigenous people of N. America and stole their land. Then they created a principled country where grand words like "all men are created equal" didn't match the reality that if you didn't own land you we're not equal to someone who did and where if your skin was a different color you were property.....shall I go on?

Mar 03 11:38 AM

[scotty1560:]

the inflation we will see his higher taxes.. direct or indirect.

Look at California.. just raised sales taxes, user fees, several other taxes.
Florida in a depression wants higher property taxes...
higher water and utility rates....gasoline taxes..
higher license fees and tag fees...

We live in a mature society that won't address internal problems of
size of government, corruption and lobbies, military spending, entitlements.

Mar 03 12:09 PM

[henarl:]

The author wrote: "The reason is that the government pays for the safety net with money that would otherwise have been used in productive endeavours."

Exactly what are these "productive endeavours" that the government would otherwise provide - maybe more military spending on stupid wars or self serving congressional earmarks or useless foreign aid ?

Mar 03 12:12 PM

[six:]

Baloney... this is a deflationary depression. How can we have any inflation with the value of real estate falling? We can't... I just read that the NBA had to borrow money for some of it's weaker teams. That means that player salaries are next on the chopping block. See... DEFLATION. By the way, the "safety net" you refer to as wasted money actually helps the economy. People spend that money...

Mar 03 12:13 PM

[henarl:]

Inflation is good for those borrowers with long term fixed interest loans, like most homeowners. It is also good for the holders of real assets like real estate, commodities, and precious metals. It is terrible for savers with bank accounts, annuities, pensions, and money under the mattress.

Mar 03 12:20 PM

[henarl:]

On Mar 03 boats wrote:

"Well hell, lets expand ALL American wars to encompass the whole freaking planet! Great freaking idea that!!!"

There is a distinct possibility that is exactly what will happen. We already have a military presence in over 130 foreign countries and our military industrial complex is a major component of the economy with immense political and financial power. There will be tremendous competition and friction over a diminishing supply of energy and other natural resources.
The Muslim terrorists show no sign of giving up their jihad and, with a nuclear armed Pakistan on the verge of joining their religious uprising, we could be looking at WWIII between the Muslim and Western worlds.
THe American empire will not give up it's hegemony peacefully and the developing world will not be inclined to let us keep it.

Mar 03 12:53 PM

[PainfullyAware:]

Not all people are evil and your broad brush strokes can be applied to Humanity the world over to find acrid valor in deed.

We must look to the "Wise Cannons" of "Utopian Society" no matter what their source. It is imperative to recognize that Utopian Society is not attainable because Evil Exists. However, if you do not focus on where you need to be you will never come close to your destination.

No society before on the planet has had access to so much information to test their paradigms. Rational and Reason will foster through the internet whether coddled or not.

There is no greater incentive for change than hardship.

Remember that the American Government no longer represents the American People. Congress passes legislation even though there is Overwhelming Dissent. Case in point - The first Bailout Bill.


On Mar 03 11:38 AM boats wrote:

> I suggest that principle has never existed in America. Colonists
> killed off most of the indigenous people of N. America and stole
> their land. Then they created a principled country where grand words
> like "all men are created equal" didn't match the reality that if
> you didn't own land you we're not equal to someone who did and where
> if your skin was a different color you were property.....shall I
> go on?

Mar 03 01:00 PM

[plumstupid:]

Aristophanes:

I found this comment about you that may be of interest:

seekingalpha.com/user/...

Be well, I very much enjoy your comments and learn much from them.

Mar 03 01:21 PM

[Bruce Miller:]

Money is created by the government issuing treasury notes to the federal reserve. The federal reserve then prints money to loan to the federal government. However since the Federal Reserve Act of 1913, the banks call these treasury notes assets. The Act allows for fractional banking. That means that for every dollar the government trades for cash with the Federal Reserve, the Federal Reserve can loan out ten dollars. So now we not only have an increase in the national debt, we also have our money inflated by printing out and loaning to general public ten times the origional debt. The Federal Reserve creates cash out of thin air, hence the cause of inflation. So we now not only have the government in debt, but we have the general population in debt also. It is debt that creates the money supply. The greater the money supply the less each individual dollar is worth. From 1940 to 2008 the value of the dollar is only five cents. The collapse of the monetary system is the design to achieve the goal of a one world currency. To find out who actually owns the Federal Reserve, read my blog at: causeofinflation.blogt...

On Mar 03 07:28 AM boats wrote:

> The author wrote: "debt always grows faster than the money supply.
> It is therefore a good bet that the quantity of debt will continue
> to expand until the entire monetary system collapses."
>
> Can't fault you there.

Mar 03 02:45 PM

[Gtarras:]

"The reason is that the government pays for the safety net with money that would otherwise have been used in productive endeavours."


huh? what is more productive than giving PEOPLE a chance?

Mar 03 03:09 PM

[fireball:]

boats
wow...i guess i was mistaken. in an earlier post i implied that we might have similar views as far as concern for the u.s..
as i said i have considered the course you chose but i do not want to abandon my country to the "dogs". i also had an interest in living better on less in a place where my dollars would go further. that was before things started getting obviously ugly here.
i am one of those rednecks that stands and puts his hand on his heart when "the star spangled banner" plays. one of those idiots that supports our troops whether i agree with the war or not, one who believes that most americans (and people in general) are usually good. someone who will give to help a friend or neighbor in trouble. i have never owned a slave (and am proud that my ancesters were abolishionists), i have never taken anything from an indian, i admire the founding fathers for standing against the most powerful nation on earth and overcoming impossible odds, and appreciate the free society they tried to leave us. i am proud of my country, even as it spirals down the toilet of socialism, because we have tried to help when other nations met catastrophe.
i realise that i am just a corny guy that has worked hard and seized the opportunities that came my way. one of those mind your own business unless someone is harming a weaker individual foolish people. instead of being ashamed because in a different era there were slaves here, i admire that in comparison to most countries america got it right in a relatively short period of time.
i am not so wise or sophisticated as you. i do not see racists, bigots, and hypocrits behind every statement that i don't agree with. instead i try to engage in civil debate and conversation so that i can at least understand where the other guy is coming from. i consider insult and profanity the recourse of the ill-prepared. i am just a dumb individualist not a savvy statist. one of those simpletons who believes liberty is worth a struggle and socialism, communism and facism all lead to tyranny and oppression.
may i always remain a stupid patriotic redneck and not become so wise that i feel shame for being an american. i would rather fight the evil that is rising and lose than cower in comfort in exchange for false safety and false security.
i applaud the successful and do not wish to steal the fruits of their success through taxation. i do not presume to know how much money one should make, what car they should drive, what house they should build, what gun they should own or not own, how their children should be raised or educated.......
guess i'm a wanker boats.

Mar 03 04:11 PM

[robert.b.fe...:]

Real world economics are tied to commododities. That is to say fiat currencies are only worth what real commodotoes they can purchase. This administration is seeking to fundamentaly transform our ecopolitical system. In order to accomplish these goals the old system must be destroyed. Rham Emanual has stated as much on more than one ocasion. Stating that a major crises should be used to accomplish things that you would not be able to do under ordinary circumstances and that energy prices are much too low. all of these statements by prominant democrats including the President should be a warning to all that they plan on changing your life forever and not for better. The plan is to ratchet up the cost of energy (Cap and trade) thereby increasing the cost of every thing else except housing which will be subsidized. That is just the start you are looking at the end of private property ownership as the costs will make that option untennable. Destroying the upper class and upper middle class will not make the plight of the poor any better but will go far in cementing permanant power for the democrat party. This whole spending frenzy is not geard to improve the economy it is built for the express purpose of destroying free market enterprises. Thus taxing small buisiness owners out of existance and placing as many people as possible in a position of government dependance is the order of the day. So long capitalist democracy I think I will move to Austailia.

Mar 03 04:12 PM

[plumstupid:]

Don't move to Australia if you want capitalism, democracy or freedom. It's a police state now and getting worse.


On Mar 03 04:12 PM robert.b.ferguson wrote:

> Real world economics are tied to commododities. That is to say fiat
> currencies are only worth what real commodotoes they can purchase.
> This administration is seeking to fundamentaly transform our ecopolitical
> system. In order to accomplish these goals the old system must be
> destroyed. Rham Emanual has stated as much on more than one ocasion.
> Stating that a major crises should be used to accomplish things that
> you would not be able to do under ordinary circumstances and that
> energy prices are much too low. all of these statements by prominant
> democrats including the President should be a warning to all that
> they plan on changing your life forever and not for better. The plan
> is to ratchet up the cost of energy (Cap and trade) thereby increasing
> the cost of every thing else except housing which will be subsidized.
> That is just the start you are looking at the end of private property
> ownership as the costs will make that option untennable. Destroying
> the upper class and upper middle class will not make the plight of
> the poor any better but will go far in cementing permanant power
> for the democrat party. This whole spending frenzy is not geard to
> improve the economy it is built for the express purpose of destroying
> free market enterprises. Thus taxing small buisiness owners out of
> existance and placing as many people as possible in a position of
> government dependance is the order of the day. So long capitalist
> democracy I think I will move to Austailia.

Mar 03 04:58 PM

[terryg8:]

On Mar 03 08:35 AM prudentinvestor wrote:

> Great article, summarizing the inconvenient truth.
>
> Your final paragraph:
>
> "In summary, under the current monetary system the debt can never
> be "inflated away" because inflation occurs via the creation of additional
> debt........"
>
> If the interest rate on the debt is lower than inflation, then obviously
> the real debt burden will shrink over time. This is basic arithmetic.
> Obviously, you have to consider the real inflation, which I suggest
> has been higher than the reported numbers. Additionally, since interest
> on Treasurys is federally taxable, it means that the real after-tax
> interest rate is even smaller than the coupon. I would suggest that
> "inflating down the debt" is a very viable option, if not the only
> option, and is indeed being implemented.
>
> I should add that "inflating down government debt" is a very old,
> tried and true method. In the days of physical, metallic money, "clipping
> the coinage" or "re-minting" was periodic practice. The populace
> had to hand in their gold or silver coins and be given new ones with
> the same nominal value, but containing less gold or silver. Those
> found in possession of the original coinage after the grace period
> had expired would be subject to forfeiture, if not torture or death!

I can see the torture and death part coming very soon!

Mar 03 11:26 PM

[plumstupid:]

fireball,

Your country was abandoned to "the dogs" decades ago. A sad fact that is unfortunate.

There are many places where you can live better cheaper. There are many places you can live allot better on the same money you are spending where you are. As ugly as you see things have gotten why would you remain in a country where the gov't has abandoned YOU? Where its only going to get worse?

How, as you know its corny, can you continue to pledge to a country that has ABANDONED YOU? A country that has thrown you to the dogs? A country that has broken faith with you? I don't get it. Patriotism is one thing. I used to feel patriotic too. Right up to the nanosecond I realized they broke faith with me. They don't deserve anyone's patriotism.

All the attributes you have about how to live a good life are good ones. Ones to keep living by. Those attributes can be found in the heart of people in China, Afghanistan, Iran, Russia and every country around the world. They're not exclusive to Americans. They will hold you in good stead anywhere you choose to go.

If America got things so right how is it that America is the only western country that doesn't have socialized medicine and pays twice as much as the other western countries for medical care in terms of GDP? If America got things so right why does it have 1 in 33 of its citizens in jail? Understand, America has more people in jail than all of the rest the so-called 1st world countries combined? America has more people in jail than China who has 1 billion more people! If America has gotten things so right why has it allowed one mange covered class to bring down the whole economic system worldwide through abject greed? I submit that America has gotten it allot more wrong than right.

You know these things are true. Why the blind faith?

I agree its anyone's absolute right to purchase any kind of product they want. Absolute right.

When their absolute right to buy an SUV that gets 7mpg causes the whole of society to be less secure because so much American money goes to countries America has pissed off with its foreign policy then I believe that society has the absolute responsibility to tax that SUV at 300% of sticker. You still have the absolute right to buy that vehicle. You had better be able to afford it. Simple really. Oh and those Congresscritters gave small business owners a significant tax deduction to buy Hummers and Escalades and such so don't complain about social engineering.

The people who put the wrong idea in American's heads about socialism are the ones who stand to lose the most. Those are the top 1%. Why would anyone struggling to make ends meet defend rich jerks who are quite literally killing them?

Good luck fireball.

Mar 03 04:11 PM fireball wrote:

> boats
> wow...i guess i was mistaken. in an earlier post i implied that we
> might have similar views as far as concern for the u.s..
> as i said i have considered the course you chose but i do not want
> to abandon my country to the "dogs". i also had an interest in living
> better on less in a place where my dollars would go further. that
> was before things started getting obviously ugly here.
> i am one of those rednecks that stands and puts his hand on his heart
> when "the star spangled banner" plays. one of those idiots that supports
> our troops whether i agree with the war or not, one who believes
> that most americans (and people in general) are usually good. someone
> who will give to help a friend or neighbor in trouble. i have never
> owned a slave (and am proud that my ancesters were abolishionists),
> i have never taken anything from an indian, i admire the founding
> fathers for standing against the most powerful nation on earth and
> overcoming impossible odds, and appreciate the free society they
> tried to leave us. i am proud of my country, even as it spirals down
> the toilet of socialism, because we have tried to help when other
> nations met catastrophe.
> i realise that i am just a corny guy that has worked hard and seized
> the opportunities that came my way. one of those mind your own business
> unless someone is harming a weaker individual foolish people. instead
> of being ashamed because in a different era there were slaves here,
> i admire that in comparison to most countries america got it right
> in a relatively short period of time.
> i am not so wise or sophisticated as you. i do not see racists, bigots,
> and hypocrits behind every statement that i don't agree with. instead
> i try to engage in civil debate and conversation so that i can at
> least understand where the other guy is coming from. i consider insult
> and profanity the recourse of the ill-prepared. i am just a dumb
> individualist not a savvy statist. one of those simpletons who believes
> liberty is worth a struggle and socialism, communism and facism all
> lead to tyranny and oppression.
> may i always remain a stupid patriotic redneck and not become so
> wise that i feel shame for being an american. i would rather fight
> the evil that is rising and lose than cower in comfort in exchange
> for false safety and false security.
> i applaud the successful and do not wish to steal the fruits of their
> success through taxation. i do not presume to know how much money
> one should make, what car they should drive, what house they should
> build, what gun they should own or not own, how their children should
> be raised or educated.......
> guess i'm a wanker boats.

Mar 04 03:10 AM

[fireball:]

plumstupid
i have read several of youur posts. i have almost commented to you several times, you are most definitely not stupid. i have enjoyed your posts.
you raise many good points.
i think one thing that might save many words: my loyalty is to the free society and the constitutional republic. i love my country but despise this convoluted mess the politicians have made of what we should have. i would like to head for "cheaper parts" but i am not ready to give up the fight to restore constitutional govt.. it looks pretty hopeless right now i admit. my pretty half says i'm to stupid to know when i'm beat but that is an attribute she loves.
i would submit that healthcare is a problem because of govt. involvement in the first place. i suspect i am older than you. when i was younger even though govt had begun to get involved there was still competition and prices were still reasonable. i realise that medicine (and inflation) have come a long way since then. i.e. the cyber knife and the davinci. still i think their use has become outragious because of govt. intervention and malpractice insurance. (lawyers and politicians again)
you are correct that the politicians have broken faith with me (us)
the high incarceration numbers are out of line. too many people go to jail for the wrong things. i think maybe we have a few million to many laws. i happen to think an adult should be able to indulge in any vice they can pay for. i may not like it, and may even disapprove but it is none of my business. if an addict comes to my home i am a good shot. i wouldn't even need to kill them but after the bernie getz case i guess you should. i would like to see a little common sense in the courts again such as punitive costs to the plaintiff for a frivolous lawsuit. "the coffee was hot." you are again correct but i want to see it brought back to reason.
there is much distortion of the numbers on oil. i believe canada is our main supplier. the easiest way to take money from the pockets of terrorists and tyrants would be to increase our own energy production. however govt. regulation has hamstrung our efforts in cost efficient alternatives. solar and wind are great but they are not yet capable of competing in price. they deserve research by innovative companies. in the meantime i would say pursue what is cost effective.
there are provisions in the constitution to thwart monopolies, cartels, etcetera. there is no enforcement because (lobbying) legal bribery feeds the politicians in their efforts to cling to power.
i believe the economy would be humming along if the federalis were forced to comply to constitutional limits on taxation. they are supposed to get income from import export taxes to insure fair (not free) trade. that isn't much money so many buy the vote programs would be eliminated. imagine the cash from no irs and no marx/engles income tax.
the things you say are very valid ps (can't bring myself to call you stupid) i just want to correct these abberations.
much luck to you too. thank you for giving me stimulation to consider and re-evaluate my ideas.

Mar 04 09:41 AM

[Blackeyebart:]

Your preffered solution is irrelevant as no Government will ever try it.
This is because as circumstances decline, people (voters) will turn to the Government for help. Government cannot ignore those calls, they have to to answer them. The answer is, presumably, "We will do nothing because that is in the best interests of everyone." This exposes them to the criticism of their opponents.

Their opponents choose, for some reason, not to advance a program based on masochistic ritual and extreme right wing theology. This makes them appear reasonable and sensible.

The Government's support starts dropping faster than the Dow and it decides that, "If people really want us to act- then we'll act. This is,after all, a democracy!"

So we will never get to see if your plan would have worked.
But never mind - you could always try it on rats.

Mar 06 08:24 PM