A Dire Warning...

A dire warning for the world by Prof Paul Krugman:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending....

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy....

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

I tend to share in Prof Krugman’s views and concerns for the future. I maintain that monetary contraction (as in austerity measures) risks deflation and depression. Conversely, monetary expansion (as in "printing money") risks inflation and recession. Given an opportunity to choose between these two risks, I would choose monetary expansion and the risk of inflation.

Source: Krugman, P (2010, June 27), The Third Depression, NY Times.

US Enduring Economic Depression

According to Nobel Laureate Prof Paul Krugman (2011, December 11), "it’s time to start calling the current situation what it is: a depression." In July 2010, I reported that a Main Street depression was imploding America. Since then, the depression along Main Street has continued to expand and envelop the US national economy through today, when many in America are increasingly anxious or even afraid for the future. Evidence of economic depression in America includes the persistently low employment-to-population ratio, the devastating declines in home values, and the extended decline in real working class wages over the past decade -- this evidence is indisputable.

"Time Saving Truth from Falsehood and Envy" by François Le Moine (1688-1737)

I agree with Prof Krugman -- it's time for Americans to accept that our nation is mired in an economic depression that is deeply scarring our national political fabric -- it's the truth.

Source: Krugman, P (2011, December 11), Democracy and Depression, NY Times Online.

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Main Street Depression Imploding America

US Employment to Population Ratio for November 2011

US Home Values Caught in Rut

Human Suffering is Absolute

The expanding Main Street Depression in the US is now accelerating, and in absolute terms, the level of human suffering reached to date surpasses that of the Great Depression of the 1930's. According to the Bureau of Labor Statistics, more than 15.1 million Americans were unemployed as of July 2010. In contrast, 12.8 million Americans were unemployed at the peak of the Great Depression in 1933.

[Click image to expand]

I personally refuse to marginalize human suffering using ratio analysis, and I would urge our fiscal and monetary policy-makers to do the same. When historians study wars, they count casualties in absolute numbers of souls rather than as percentages of some given population. Likewise, economists must learn to study depressions using the absolute numbers of people effected. The Main Street Depression now imploding America is a horrific event in our nation's history that needs to be understood in absolute terms and numbers that make it real rather than abstract. Said another way, economists must learn that human suffering is absolute.

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US Economic Prospects for 2012...

Europe will blowup once everyone realizes that the degree of "restructuring" required in Portugal, Italy, Ireland, Greece, and Spain (PIIGS) is politically infeasible. Consequentially, public spending cuts and tax increases are imminent across the PIIGS, be they instituted by public policy or national defaults. Either way, economic depression is descending upon Southern Europe.

Protestors wearing "Guy Fawkes" masks in London

The US is also facing a blowup given that banks made a "seasonal" decision to hold off on new foreclosures until after the New Year. In 2012, the US will be confronted with the largest increase in new foreclosures since 2008.

Likewise, a budget blowup in California has been on tacit hold until after the holidays. Nevertheless, California revenues are trailing budget requirments by a significant margin. Moreover, Gov Jerry Brown appears determined to conduct "business as usual" in order to amplify the California budget crisis into a voter mandate for tax increases. Whatever happens, it's bad news for California where major cuts in government employment and/or tax increases will eventually force California into economic depression on a scale not seen on the West Coast since the Great Depression.

The combination of sharp increases in mortgage foreclosures and budget remedies in California means catastrophe along the US West Coast on a scale similar to what is about to unfold along the southern flank of Europe. Deflation and depression are already evident across America in home values, real wages, and the employment to population ratio.

The economic prospects for 2012 in the US and much of Europe are grim at best. Accredited investors are certainly in a "buy" window of opportunity at this point. However, much of America is in for hard times this coming year...

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Main Street Depression Imploding America

At this point, I see nothing coming from Washington, Wall Street, or overseas that can avert what is now a Main Street Depression in America. The reality of persistently high unemployment, the unprecedented and expanding number of foreclosures, the rising tide of regional and local bank failures, the dearth of investment capital for small business expansion, and the devastating deflation in home prices across the nation is indisputable. The Main Street Depression of the early 21st century is imploding America at its heart...

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The Rhetoric of Depression...

"There will be no interruption of our permanent prosperity." ~ Myron E Forbes, President, Pierce Arrow Motor Car Company, January 12, 1928

"I have no fear of another comparable decline." ~ Arthur W Loasby, President, Equitable Trust Company, quoted in NY Times, October 25, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect." ~ Paul Block, President, Block newspaper chain, editorial, November 15, 1929

"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." ~ E H H Simmons, President, NY Stock Exchange, January 12, 1928

"Buying of sound, seasoned issues now will not be regretted." ~ E A Pearce market letter quoted in the NY Herald Tribune, October 30, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression..." ~ Harvard Economic Society, November 2, 1929

"For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over." ~ Business Week, November 2, 1929

"This crash is not going to have much effect on business." ~ Arthur Reynolds, Chairman, Continental Illinois Bank of Chicago, October 24, 1929

"For the immediate future, at least, the outlook (stocks) is bright." ~ Irving Fisher, leading US economist, early 1930

"Financial storm definitely passed..." ~ Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most." ~ Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"Hysteria has now disappeared from Wall Street..." ~ The Times of London, November 2, 1929

"... a serious depression seems improbable..." ~ Harvard Economic Society, November 10, 1929

"Gentleman, you have come sixty days too late. The depression is over." ~ Pres Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

"This is the time to buy stocks." ~ R W McNeel, market analyst, NY Herald Tribune, October 30, 1929

"There may be a recession in stock prices, but not anything in the nature of a crash." ~ Irving Fisher, leading US economist, NY Times, September 5, 1929

"There is nothing in the situation to be disturbed about..." ~ Andrew Mellon, Secretary of the Treasury, February 1930

"I think the bloom is off the rose, but there is no doom and gloom." ~ Alan Nevin, Chief Economist, California Building Industry Association.

"While the crash only took place six months ago, I am convinced we have now passed through the worst ~~ and with continued unity of effort we shall rapidly recover." ~ Pres Herbert Hoover, May 1, 1930

"[1930 will be] a splendid employment year." ~ US Dept of Labor, New Year's Forecast, December 1929

"The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin." ~ Stuart Chase, American economist and author, NY Herald Tribune, November 1, 1929

"The spring of 1930 marks the end of a period of grave concern... American business is steadily coming back to a normal level of prosperity." ~ Julius Barnes, head of Hoover's National Business Survey Conference, March 16, 1930

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the IRS." ~ Pres Franklin D Roosevelt, 1933

"Buying of sound, seasoned issues now will not be regretted..." ~ E A Pearce market letter quoted in the NY Herald Tribune, October 30, 1929

Depressions Past and Present

My previous post entitled Unemployed Should Consider Emigration featured a photograph of today's signage warning the unemployed to keep out and move on. The similarities between the current Main Street depression and the Great Depression are striking...

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Public Dental Clinics: The 1930's is Today

The Main Street Depression that continues to ravage America invites comparisons between today's economy, and that during the Great Depression of the 1930's. Consider the photographs that follow. The first depicts a public dental clinic that treated school children by the busload in Rochester, NY during the Great Depression. The second is a photograph of a typical public dental clinic operating in America today.

Public Dental Clinic in America during the 1930's...

Public Dental Clinic in America Today...

Of course, the quality of dental care has improved dramatically since the 1930's. However, the delivery of clinical dental care to those in need seems to have changed little, or so it appears...

US Jobs Recovery to Take Years

According to the The Hamilton Project at Brookings (2010, August 20), the US economy will have to create 11.6 million new jobs in order to return to pre-economic crisis employment levels. Moreover, the US economy is still shedding jobs, which means that the nation's unemployment wounds will fester into the indefinite future. Even after employment levels begin to increase in the US, Brookings reports that a full jobs recovery could take upwards of 5-12 years with the longer scenario being more likely.

The US economy will need more robust growth to close this gap. If future job creation reaches about 208,000 jobs per month, the average monthly job creation for the best year for job creation in the 2000’s, it will take almost 140 months (about 11.5 years) to reach pre-recession employment levels. In a more optimistic scenario with 321,000 jobs created per month, the average monthly job creation for the best year in the 1990’s, it will take 59 months (almost 5 years).

The chart below shows the amount of time necessary to close the employment gap for different rates of job creation based on experience data from the decade beginning in 2000.

[Click image to enlarge]

The US is now enduring the worst unemployment crisis since the Great Depression. Currently, more than 15.1 million Americans are unemployed, which compares to 12.8 million Americans at the peak of the Great Depression in 1933.

Source: Greenstone, M & Looney, A (2010, August 20), The Long Road Back to Full Employment: How the Great Recession Compares to Previous US Recessions, Brookings.

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Main Street Money

Given the extent of the Main Street Depression now raging across America, and given that monetary and fiscal policies have left America with insufficient legal tender to conduct local and regional commerce, should municipalities, counties, and even states consider issuing their own "scrip" as a means to expand the available money supply?

National Park Bank of New York Clearing House Certificate for $500 (1873)

During past depressions in the US, the appearance of local currencies in the form of "depression scrip" became commonplace (see examples). California has recently experimented with issuing warrants to its citizens in lieu of tax returns (see last example). The use of local and regional currencies is not without precedent in the US.

Five Dollar Certificate issued by the San Francisco Clearing House (1907)

Town, cities, counties, and states across the US are being strangled by deficits, and the supply of legal tender for commerce is simply inadequate to sustain current spending levels and public services. Should these same entities consider issuing their own currencies as a way to supplement the local money supply and maintain current levels of public employment and services? So far, a Main Street economic recovery appears elusive, especially given that our nation's fiscal and monetary policy-makers view local prosperity as a by-product of national prosperity. I would not be surprised to see local, regional, and even state currencies sometime in the near future.

Five Dollar Certificate issued by the Chicago Clearing House (1933)

Public entities that create their own currencies could use these "dollars" to pay public employees, contractors, suppliers, and pensioners. Additionally, public healthcare programs funded by states could be paid for using local currencies as services are rendered. Finally, local currencies could be used to pay public taxes due from taxpayers and business entities within those jurisdictions. Of course, this would mean that what America knows to be a "dollar" would become somewhat confusing. However, the creation of local and regional currencies could very well be a useful way for states to manage their budget deficits, or at least until the US money supply becomes more robust on a local and regional basis.

Warrant issued by California (2009)

The shortage of money in various localities and regions across the US has created a crisis, especially given that the nation's largest banks and corporations are continuing to hoard cash for whatever reasons. Perhaps expanding the Main Street money supply can be accomplished without the consent of the US Federal Reserve after all.

The New Lords of America

The still expanding Main Street depression is creating buy opportunities all across America. My guess is that high quality rent-earning real estate and dividend-paying stocks will be snapped up quickly by those with cash, including investors from overseas. America is "on sale" and cash buyers are now eagerly sought by sellers (i.e., too many goods chasing too little cash, which is the macroeconomic formula for deflation and depression).

Those with world-class skills to sell (e.g., physicians, engineers, and entertainers) or significant rent and dividend income are the new lords of America. Everyone else (e.g., those who live on fixed incomes, government salaries and entitlements, or earn wages for other than world-class skills) are in for hard times...

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Declining American Home Values Evidence Depression

According to Zillow, the median value of a home in the US declined from $240,000 to $169,600 between April 2006 and March 2011. The aggregate decline in home values totalled approximately 29% for the five-year period.

Society needs to come to terms with the facts: US home values have been steadily declining for the past five-years. The continuing collapse of real estate values in the US provides clear evidence of economic depression in America.

Source: Zillow

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Main Street USA in Economic Depression

I posit that Main Street USA is now in economic depression. My evidence thereof includes the record pace of regional and local bank failures, the current state of job losses and unemployment, the rising rate of personal bankruptcies, the record number of home foreclosures, and the deflation in home prices across the country. I weep for America...

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Ways to Prepare for Economic Depression

Here are some ways that ordinary people can prepare themselves and their families for economic depression:

• Convert knowledge and experiences into basic skills.
• Eliminate indebtedness.
• Stockpile food, water, and medications.
• Avoid marriage or divorce until prosperity returns.
• Avoid adding children until prosperity returns.
• Start a garden.
• Use public transportation.
• Expand your circle of friends.

I weep for those suffering economic hardship in America today, even if what we are experiencing is only a "recession"...

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The G20 Toronto Summit Legacy

The Europeans assume that the world is going to go along with their austerity planning. However, the US cannot turn its back on California and New York the way that Germany and France can shun Greece, Spain, and Portugal. Monetary expansion in the US is immiment, whether Europeans like it or not. The European Union is blundering and may very well force the world into a deeper recession, or even depression...

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America's Main Street Depression

I regret that while public corporations in the US have been experiencing a profit rebound in recent months, Main Street America remains in economic depression. The decoupling of our nation's largest "too big to fail" public corporations from Main Street has created widespead economic turmoil and hardships for small companies and familes in America. The continuing demise of Main Street began when US monetary and fiscal policy-makers unwisely posited "too big to fail" as a governing principle.

Treasury Sec Henry Paulson and Federal Reserve Chief Ben Bernanke (2008)

Keep in mind that "too big to fail" was the conceptual argument invoked back in 2008 by the US Federal Reserve lead by Dr Ben Bernanke, and the US Treasury lead by Treasury Secretary Henry Paulson. Today, gigantic "too big to fail" public corporations enjoy tacit financial guarantees from the Federal government, while small companies and businesses along Main Street are essentially left out in the cold.

America's emerging consolidated banking system is now laced with systemic risks extending from Wall Street into every facet of regional banking. In my view, the nation's banking needs would be better served by many thousands of smaller community and regional banks, instead of a few "too big to fail" financial institutions aligned with Wall Street. The economic risks associated with building and maintaining "too big to fail" corporations are not well-understood. Nevertheless, our nation's central banking system continues to grow larger while Main Street America is left to languish.

I cannot help but think that the powershift from Main Street to America's center will eventually lead to new unforeseen difficulties for America. History tells us that over centralization carries risks. Recall that the former Soviet Union was never able to marshal the human know-how and technical resources to manage and direct a massively centralized command economy. Is capitalism somehow different? I doubt that the US will be able to manage from the center indefinitely.

Years from now, a comfortably retired Dr Ben Bernanke will write in his memoirs something like this:

"...I wish we at the Federal Reserve would have paid closer attention to the impact of monetary policy on small businesses and community banking in America -- in reflection, I would have been more attentive to the plight of small businesses and regional banking across the nation -- however, we had no choice but to save the largest "too big to fail" institutions in America because we felt that saving Federalism was our mandated priority..."

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Well Said...

"Who is the greater criminal: He who robs a bank or he who founds one?"

~ Kurt Weill

Kurt Weill (1900-1950)



"Mack the Knife" clip from the movie, "Die Dreigroschenoper" or "Three Penny Opera" (1931)

Kurt Weill wrote the original opera music for "Die Dreigroschenoper" in collaboration with Bertolt Brecht in 1928, just prior to the Great Depression, which began the following year. The Victorian era figure of "Mack the Knife" in the film clip above has an uncanny resemblence to the infamous Wall Street banking tycoon, J P Morgan.

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Back to School

Along with my colleagues, I am back to school fully engaged in facilitating and encouraging active learning, thinking, and scholarship. Of course, with each new year comes changes in the nature of the college experience for both learners and educators. I suppose that higher education is incrementally "reinvented" in very subtle ways as each year passes.

This year, students and faculty alike are returning to the halls of higher education in an environment of economic uncertainty, both for the economy and for capitalism. Clearly, the world has changed since last year as unemployment and human suffering have reached levels not seen since the peak of the Great Depression in 1933. For these reasons, researchers and students have become increasingly anxious to consider and understand what is happening economically, including implications for the future.

Prof Walter Russell Mead, Bard College

I came across a very interesting article by Prof Walter Russell Mead entitled, Back to School, which includes some useful guidance for everyone engaged in higher education. Here's a taste of Prof Mead's advice for college students, today:

Choosing the right college is over-rated. Just about every college in the United States has more talented and interesting students than you will have time to get to know in four years. At every college in America you will not be able to take all the great courses from great faculty, read every worthwhile book in the library, or participate in all the rewarding extracurricular activities.... Choosing the right courses, on the other hand, is under-rated. In the old days you could take a lot of silly courses and guts and get away with it. But your generation is going to have to scramble and you need every edge you can get.

You can read Prof Mead's entire article by following the link below:

Source: Mead, W R (2010, August 31), Back to School, The American Interest Online.

US Employment to Population Ratio Declining

The latest employment data just released by the Bureau of Labor Statistics (BLS) shows that the US employment to population ratio suffered another decline in August 2010 to 58.8%, down from 59.3% for the same period last year, and from 58.9% for the previous month in July.

Many economists believe that reporting the number employed as a percentage of the civilian population provides a more accurate description of the current state of employment than conjecturing the number of "unemployed" in a population. The US employment to population ratio reached a historical peak of 64.4% on an annual basis in 2000.

Source: Bureau of Labor Statistics

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Deflation or Inflation...?

I maintain that monetary contraction (as in austerity measures) risks deflation and depression. Conversely, monetary expansion (as in "printing money") risks inflation and recession. Given an opportunity to choose between these two risks, I would choose monetary expansion and the risk of inflation.

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