Wednesday, November 19, 2008

Why this Depression Will be Worse, Much Worse

A Depression occurs when a recession is combined with a deflation. The economy cycles downward out of control in a black hole of dying economic activity leading to lower and lower prices and levels of employment. The bottom of the Depression is reached when all unproductive jobs, bad loans, and excess inventories are liquidated. A Depression economy also sheds itself of all extraneous activities, stripping itself down to the production of bare essentials for living, the demand for which cannot fall any further (except through mass death or something that actually decreases population levels). Prices and wages fall to that floor, then can get rebuilt, as new loans become safe and new production can resume.

We are facing a number of factors that today will prevent this cycle from functioning properly. Our society is burdened with so many artificial constraints, barriers, weaknesses, and institutional problems, that it lacks the organic flexibility to respond to these Depression conditions in functional way.

For one, we are now burdened by poor governmental policy, like minimum wage laws, regulations, and government bail-outs. In a deflationary environment, profits for producers are falling because of falling prices. In order to survive, the producer must decrease costs to adjust to lower revenues. But minimum wage laws will prevent producers from decreasing costs past a certain level. When revenue falls below the minimum fixed cost of labor, economic activity simply dies. Our governmental policy is now far more active also, throwing bail-out after bail-out of mass cash injections into the economy in order to prevent the downturn. Our leaders seek to battle the deflation with the weapon of debt-based inflation, which is exactly what got us into this situation. The leaders in the 1930s, while keeping the money supply too tight, at least had the good sense to let the bankruptcy cycle proceed, which is like an economic circle-of-life, allowing bad assets and debt to be eliminated and recycled.

A second factor facing our current economy is our high debt level. A deflation is a death sentence for business in an environment of high debt. Deflation lowers revenue, which makes it difficult if not impossible to pay off the high debts accrued before the inflation. This effect is visible to all in the housing meltdown going on now. Housing prices are deflating, putting people upside-down on their mortgage loans, resulting in mass defaults, which feeds further housing deflation. Banks are devastated by the mass defaults and have to curtail operations, not only because they have less money to loan out, but also because new loans are likely to get sucked up by the deflation. Making loans in a deflation is a formula for guaranteed failure, because future prices will not support current loans, a fact which of course leads banks to stop loan activity. Their failure to offer loans then stifles real business activity, leading to more unemployment and a decrease in real wealth, feeding the deflation and Depression. The more loans outstanding at the beginning of the deflation, the greater the economic catastrophe. With our country leveraged to astronomical heights at all levels of society -- personal, commercial, and governmental -- the financial and economic conflagration will be total.

The third factor that will exacerbate the coming Depression is the productive basis of our current economy. During the Great Depression of the 1930s, America was an agricultural, industrial, and manufacturing nation. Almost half of the country still lived on rural farms. City dwellers were engaged in productive wealth-creating business, all domestically based, such as oil, mining, steel, manufacturing, and skilled trades. Thus, the fall to bare-essentials level was not catastrophic, since we could absorb a 25% unemployment level on the back of our wealth-producing activities and vast agricultural lands, which could absorb lots of marginal labor. Our domestic industries had to scale back and downsize, but they were still there, they still existed to support our population.

Today's situation is vastly different. We are no longer an industrial economy. Agriculture supports only a tiny fraction of our population, and it is largely mechanized, not able to absorb marginal laborers. The vast majority of our population lives in cities now, engaged in jobs that do not create real wealth. Most employment today is in activities that will be shed in the dive to an "essentials only" economic floor of a Depression. Nonessential services -- like entertainment, sports, restaurants, and retail -- these aspects of our economy are already being devastated and will continue to shrivel as the Depression deepens in cycles of layoffs and deflation. Education, health-care, criminal justice, government, paper-pushing knowledge work of all kind -- these are all not wealth producing activities. Only those support services that are closely related to the core wealth-creating activities will survive. Unfortunately, we have few core wealth-creating industries available to support our population, thanks to a generation of outsourcing and offshoring, a forced globalization based on free trade ideology.

The fourth, and ultimately the worst factor that will exacerbate our coming Depression, probably launching it into a full-scale social collapse, is the quality of our human capital. Ever see those pictures of the Great Depression, of the men lined up around the block, in their suits and hats? Those days are long gone. Our current population is spoiled, lazy, fat, and dependent. They are lacking respect for themselves or for authority, even though a high percentage of them are dependent on government support for their survival. Our social fabric has been torn by a generation of culture wars, and few people even know their neighbors, let alone feel a sense of community with them. Racial animosity and resentment are at an all time high, along with the populations of minorities who feel that resentment, not getting along with each other or with the dwindling white majority . The family has been disintegrating for a couple generations, as stable marriages and parental guidance has become a thing of the past for the majority. We also face a huge population and economic contraction based on the aging of the massive Baby Boom generation, as they retire from their jobs, drawing down their wealth in leisure, and bankrupting the nation with their health care costs.

Sounds pretty bleak, doesn't it? It is emotionally difficult to even contemplate the depths of the negative possibilities inherent in our current breakdown.

It is not too late to prevent the coming Depression. With a Jubilee Year, the radical wiping away of all American debt, our economy could be reborn. If that does not happen, and it probably won't, prepare for the worst. The run on guns is a rational response, and it would be wise to begin preparation to store food, although not necessary to stockpile yet. If you can switch to a wealth-producing industry, that would be good. And if you are unemployed, seek employment only in those industries. What to do with your money? There really is no good place for it, but only in no-risk bonds if you must put it anywhere. You may want to consider using your money to acquire survival tools now, like solar panels. generators, and the gardening supplies necessary to grow your own food, if needs be. Get on the largest piece of real property you can.

Most importantly, network. Make emergency plans with family and trusted friends. Make new friends with people who are also preparing for the worst. If we had adequate human capital, even an economic collapse would not lead to catastrophe, and enriching yourself with a high-capital network will be invaluable in the coming crisis. Get involved in your local block watch and formulate plans of action in the event of breakdown of civil authority. Prepare, prepare, prepare, and you will be more ready to deal with the process of social upheaval that we will undergo. Your network of sane, clear-headed, and well-prepared citizens will also form the nucleus of the new social and governmental order that will emerge from the chaos.

Always remember, united we stand, divided we fall. Get your own spiritual foundation strengthened,and you will have the strength to be a healer, uniter, and peace-maker. As we have been promised, it is the meek who shall inherit the earth.

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