Monday, 25 January 2016

The Great Depression II: Bigger and better than the last one!

If you have been watching the news right now, you might be scared. Or even confused. You might be hearing about the constant losses in the Chinese sharemarket and wondering why people are freaking out, and more importantly: what it means for you. This might be further muddled with a bunch of talking bobble-heads who are trotted out to repeat “don’t panic, everything is fine. Keep your money in the bank. Go out and buy that new iPhone. Consume!”

So here’s what it means. It involves a little history lesson. We go back to the end of the roaring twenties, specifically 1929. Throughout the decade thousands of ‘investors’, through a series of fraudulent methods, been inflating bubble after bubble of speculative enterprises that sucked the savings of Americans and through their demand, people across the world into a financial black hole (literally, because no information escaped about what was actually going on). The exact details are excellently laid out by the famous John K. Galbraith in his book “Great Crash 1929.” In fact while you’re waiting to see what happens, you might want to search that book in your local library and give it a read. It doesn’t take that long. If you want a dry synopsis, the Wikipedia page does a relatively decent job of it as well.

By 1929 this fa├žade of economic stability reached gargantuan proportions. From 24th October to 29th October 1929, now the infamous ‘Black Thursday’ and ‘Black Tuesday’, the stock market plunged repeatedly, beginning at a drop of 11% of its value at the opening bell. That amounted to $30 billion dollars of perceived wealth, wiped out in 5 days. Repeated attempts to close and re-open the market and confidence measures such as the Rockefellers and other notable businessmen buying millions of shares failed, leading to the Great Depression.

Does this sound familiar? Yes if you have been following the news. On 12th June the first shocks puncturing our most recent bubble appeared on the Shanghai Stock exchange – one of the major financial centres of the entire world, when it lost 5%. On the 7th and 9th January of this year, the market fell 18%. The Chinese government repeatedly closed the markets and most of the time, it has ended trading the day lower than it started. World markets, including Dow Jones, are also sucked into this quagmire, since most of the speculative finance heading into China is from western investors. Add to that, the extreme deflation in oil prices (which aren’t a good thing at all) and its mounting losses in the fracking industry means that a major depression is now on the horizon.

There are many people who will insist that everything is alright and that this is all normal. A good read of J.K. Galbraith’s book that I mentioned earlier will remedy any thought of that. For the last 7 years, ever since the recession of 2008, vast amounts of imaginary wealth (they call it quantitative easing) has been pumped into the world economy, where again it mostly got invested in speculative enterprises that inflated the value of investments to over a thousand times their actual worth.

People will send Bloomberg articles saying ‘look, so-and-so bobble head economist says everything is fine. You must be wrong!’ I answer: Nonsense. Economists have the liberty of being constantly wrong and yet taken legitimately to criminal levels. The so called fraudulent investors and supporting government cronies have been lying to leech their profits and cover their asses for decades – they lied about the massive delusion of America’s housing market in 2008, they lied about the actual productivity of all the oil bubbles since, and they’re still lying. If you want to take a person’s word seriously, check the accuracy of their previous statements. Most of the ‘respected’ financial authorities will turn out to be complete charlatans.

I travelled arounds parts of China mid-last year, and saw the effects of the bubble coming first-hand. Bridges half built and left derelict. Flyovers where the foundations were the only things built. Bullet rail lines that were only marked out. And to top it off, massive ghost cities where not a single person lives, the houses of which were priced in hundreds of thousands of Yuan.

The only difference is that instead of private market personalities such as the Rockefellers, the desperate market-saving attempts are being made by the Chinese government, itself heavily involved in the speculative frenzy. Billions of dollars of investment money were gambled on China’s growth. There were nowhere that imaginary money could have gone apart from into dead-end malinvestments. The much-repeated fatal mistake of confusing money for actual wealth and GDP as actual growth resulted in the massive ghost-cities and hundreds of botched infrastructure projects that have marked Chinese growth over the last decade.

So what does this mean? It could mean Great Depression II. Great-er, I should say. In the previous great depression, massive infrastructure project as part of Keynesian economic philosophy were a viable option. In a world where we still had growing access to energy supplies and ample oil, putting people to work through extracting energy and investing in capital was an option. That won’t work this time, despite the almost religious chants of many of today’s leftists that Keynesian economics is still the answer. We live in a world with dwindling energy supplies, where shrinking economies is a matter of course, and any large investment in capital runs up hard against the increasing costs of extracting oil.

This depression is going to be a lot worse than the last one. I’m sure that almost every half-baked conventional economic strategy, ranging from insane Friedmanite fantasies to extreme Keynesian money printing (I mean, screen money typing) and massive state-planning will be tried, and every single idea will crash and burn, taking large chunks of the world economy with it. They will fail because every single ideology is unequipped for the realities of ecological overshoot and is blind to the reality that we have used up over half of all the oil reserves in the world and production from here on is only going down. You can bet that it will take decades for humanity to finally blunder into a level of abstract wealth and allocation of resources (particularly energy) that actually make a little more sense based on our actual balance.

In the meanwhile, there is plenty of pain for almost everyone who is alive right now. The previous depression was marked with widespread unemployment, starvation, destituteness, poverty and loss of hope. The following decade is likely to bring the same bag of things, probably a lot worse since today’s people aren’t as recently jaded from a world war like last time, are far less equipped to live on a shoestring budget, and more importantly, can’t cope with reality without cheap access to technology to sedate them.

Being a student looking at graduating soon, the coming years are set to take a hard toll on me and my peers. A realistic dialogue is needed now, before things start biting, to convince people to start making the tough decisions needed to survive the coming years.


  1. Followed you over here from JMG's site to find an interesting article.

    A lot of people what to say we're on the verge of another 1929, but consider instead that the second 1929 was actually 2008-2009, and now we're on the verge of another 1937-1938.

    The second time around, the crash of 2008-2009 (compare to 1929-1932) was severe but limited by quick and aggressive federal government action (TARP).

    Replace the New Deal of 1933-1938 with QE and you'll see a parallel. Note that the New Deal led to a limited recovery, but another crash in 1937-1938, and another in 1938-1942 led to the recession continuing until WWII pulled us out of it, showing that the New Deal really didn't fix the problem, just pushed it off to the future. QE is looking like the same deal, except it's inflating bubbles that will pop violently and at the end of those bubbles popping, unlike the post New Deal bubble pop, we'll be left without the infrastructure improvements (in fact as you've pointed out we'll be left with much degraded infrastructure in the wake of the next stock market collapse) that we had going into WWII.

    Also note that the U.S. benefited by geography and the relative non-destruction of our country's industrial infrastructure during WWII as compared to Europe and Japan. Is that part of history going to repeat itself in some fashion? Will WWIII again spare the U.S. in terms of destruction, relative to the rest of the world? I would think that is unlikely, as modern war technology makes our geography less of an advantage as it was 70-80 years ago.

    In any case, this looks less to me like 1929 as it does 1937, with few of the benefits we had in 1937 such as a ton of untapped cheap oil and a not-as-privileged middle class who had just gone through a very rough period of time and had much lower expectations and a much lower bar of success than we do today.

    1. "Will WWIII again spare the U.S. in terms of destruction, relative to the rest of the world?"

      Oh, and one more thing about that. The offshoring of our manufacturing means we already pre-destroyed our manufacturing base, so even if WWIII's physical destruction spares the U.S., it's not like we'll have a roaring factory base ready to go to rebuild the world like last time. It is not clear to me that a global war would cause us to rebuild our factories to make war machines like we did for WWII, since the kind of war that will happen this time would be unlikely to use ships, tanks, planes, etc. in the same way as before.

    2. Those are some great points. I was thinking more along the lines of the fact that significant parts of the world's 'finance' were put in one place (this time China, last time US), and the associated economic collapse topples the old crumbling world hegemon (last time Britain, this time the US) and slowly lets the industrialised emerging world power take its place in the world.

      Of course, the depression was different in other places. New Zealand managed to get out of after 1938 when Michael Joseph Savage established the world's first modern welfare state. Britain struggled well into the 50s - rationing didn't end until 1952.

      You're quite right though when you compare America's current industrial potential and say that this time, there is no recovery. Britain was starting to get in the same position by the 30s, and on top of that most of their colonies were in open rebellion.

  2. Nicely put. Thank you. And people wonder why I farm on my one suburban acre, home school my children, and buy most everything from thrift stores. My very-upper-salary-class family members regard me as something of an embarrassment, and have no idea that I rather regard them the same way.

    1. As long as you don't do exactly as the conformist culture tells you, they'll disapprove. I can't even get away with saying that I don't want to own a car without disgusted looks.