A depression forces a redefinition of value on unwilling participants. The depression will end when people have confidence that the future is again open.

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Economic Depression 2009? by John S Veitch

Update July, 2009: The good news is that pouring money into the markets and the banks makes them flush again. The bad news is that we have not changed the way we're doing things. The debt remains. The committment to "economic growth" remails. Economic reality isn't about to become the new order of the day. The road to self destruction remains wide open.

Original text, Written in February, 2009.

Governments are reluctant to use the word "depression" and after almost a year the words "deep recession" are commonly heard. From the government's point of view, to have depression during their term of office is an admission of failure. John Ralston Saul argues that the world entered a recession in the 1980's and has never recovered. The only solution suggested by economists was financial deregulation, privatization and the reduction of public debt. The USA achieved two out of three. Public and private debt remains a serious problem, apparently now beyond the capacity of the economy to settle on time.

Markets are supposed to be subject to the law, but the legal system in all developed countries is incapable of bringing those who commit business fraud to justice. Those who are involved in these scandals are described as "smart" and reliable and they are not usually seen to be "criminals". Insider trading is "helping out a friend". The accounts of firms are "cleansed" of shady assets, and injected with fictitious profits. Offshore bank accounts allow transactions to be hidden and taxes to be avoided. In theory governments control the market, but in practice no government has the political will to do that. In the USA, it's clear to see that politicians are controlled by the sources of their funding. That's probably true in most countries claiming to be "democratic".

How did this happen?
Since the 1960's we've looked to grow the economy. A key process in that "growth" has been the displacement of women from the home into the paid workforce. Economists would say this is a transfer of people from unproductive work to productive work. It's only 20 years later that the social costs of this transfer become obvious, in crime rates, in children without roots, in the high relative price of housing.

We've seen increased interest in innovation and a drive to increase the return on "knowledge", which seems now to have encouraged an "anti-knowledge" or a "erroneous knowledge" culture. Electronic controls have improved the quality of products and reduced their size, weight and cost. Much of the increase in productivity we've been told about is questionable.

The world economy faced an "Oil Shock" in the 1970's, but we survived, and in 1987 the first serious decline in world share markets since the 1930's occurred.

In more recent times industry has been transferred to low wage countries, particularly to China.

Economists have been promoting liberalization since the 1960's. They recommend; competitive markets, free trade, unrestricted movement of capital, and the right to transfer profits, deregulation in markets and the privatization of the business activities of government organizations. In 1987, the message of both politicians and economists, was to do even more economic liberalization. 20 years later, where's the benefit? We're now in a world wide recession, much worse than 1987, and the economists tell us they didn't see it coming. What's wrong here? I saw it coming, I've been talking about it for five years. Dr. Chris Martenson, saw it coming. He's been teaching people about the economic and environmental reasons for changing the way we behave since 2003.

Flexible Measuring Tools
Debts are negative assets. The cost of holding a negative asset is close to zero. The principal of a debt is unchanging until repayment. In contrast real assets require maintenance, and the cost of holding real assets can be considerable. The price of real assets can rise and fall with market demand.

Modern accounting methods allow the revaluation of assets to market values. This makes sound theoretical sense, but it also gives managers an ability to increase or decrease apparent values on what may with hindsight prove to be flimsy evidence. So an impression of an investment in a strong position can be given to attract new funds, but when future claims are made on the assets, they may prove to be fickle.

Abolition of the Gold Standard
The USA abandoned the Gold Standard in 1971. Since then the USA has been able to create credit without restraint. This has led to an explosion of debt. Too much easy money has left the impression that, "Everyone can get rich in America". In fact social mobility in America is lower than in most OECD countries, and the incomes of 90% of all households have fallen in inflation adjusted dollars over the last 30 years. It's estimated that the USA gains about US$400 billion a year for acting as the reserve currency of the world.

IMF and World Bank policies have a sad record of almost 100% failure. What we see is a displacement of people from rural areas into the city where there are no jobs and little housing. There is inflation, and increasing reliance on imported goods. The production of goods for export grows, but the benefits of that trade are trapped by the ruling class and by overseas owners. If the government tries to correct the adverse market effects on society, an outflow of capital is likely. Governments often believe that they have lost control of their economies to the demands of the international market.

Peter Schiff of Euro Pacific Capital described economics as "the science of satisfying unlimited demand with limited resources." Perhaps we should understand those limits. This depression didn't start with the exposure of sub-prime toxic assets in financial markets. The problems have existed for many years, and have resisted solution so far.

Political
Business control of the political system is a serious problem. Since the economic system is broken, business expects government to act to restore business wealth and power, promising government that they will create jobs. Sadly this formula will only restore the old broken system, inflation will return, the destruction of the environment will continue, and real wages will continue to decline.

Government will be forced to act, in response to public anger, because rising unemployment will lead to riots in the street, as we are now seeing in Europe, but soon also in the USA. In Iceland, the public pressure in the street has changed the government. Apparently online discussion in online social networks, has seen the public develop a point of view that's independent of the political process. Perhaps that will happen in many countries.

We've seen at the 2009 Davos Conference a complete lack of ability to understand what is happening and why? There are no ideas on the table to provide a solution except to pour money into the banks and to "create green jobs".

Inflation
We've seen a lot of monetary inflation in the last 50 years. When there is inflation, money is fairly easy to get, people are confident that they can invest money and make a profit, and there is a steady demand on the banks to supply more money for investment. If the money invested is used to create new capital goods, to do some real research and development, or is spent in a way that increases the productive capacity of the economy, employment will rise, in most cases productivity will also rise and inflation will not occur. But if the money is used to buy existing shares, or consumer goods, or housing there may be a tendency for markets to become uncompetitive and for prices to rise. When the general level of prices increases we recognize "inflation". An alternative view is to realize that inflation is a general loss to the real value of the money in your pocket. The real value of your house may be falling as the nominal price in dollars continues to rise. The value of your savings, your life insurance and your superannuation is being eroded.

Deflation
Deflation is the opposite process. Money is harder to get, people are less sure that if they invest their money that they can make a profit and so there is falling investment in new capital projects. Without investment, new jobs are not created. This makes it difficult for those already employed to maintain their incomes. In the beginning there is an increase in inventory as sales decline. If the inventory build up continues, production cuts begin and eventually people are laid off. Prices fall as firms try to clear their inventory and to win new business. When people are losing their jobs and prices are falling we have deflation. In effect this causes the value of money to rise, and people quite naturally hold onto their funds if they can, saving more, and delaying purchases when they can. A short period of deflation is called a recession.

But now we have a recession that's lasted a year, and it's been mostly unresponsive to the usual tools for reinflation. (Reducing interest rates, offering a tax cut, increasing government expenditure.) We are seeing and will see more bankruptcies, company closures and mortgage defaults. A debt based financial system creates pressure for exponential growth to give reality to the claim that "compound interest" is the magic formula that will provide you with a secure retirement fund. That turns out to be untrue. Compound interest, even at a relatively low level like 3% is unsustainable over long periods of time. Australian academic Geoff Davies says; "The catch with this system is that the things the debt is supposed to represent, the things owned are physical, and physical things cannot keep doubling indefinitely. Thus we have created a system that cannot endure."

Depression 2009
It's now very clear that we are in a depression. This is the worst recession since the 1930's. Economists know well how governments responded in the 1930's and that the policy response was wrong. Around the world today governments are trying to re-inflate the economy by pumping money into the system. So far with very little success.

Jared Diamond has written a book called "Collapse: How Societies Choose to Fail or to Succeed". The key point Diamond makes is that time after time societies collapsed from a period of high success. Moreover, they commit suicide by group choice rather than being adaptable in order to survive. Each society has it's cultural rules, and insists on being "true to our own vision", even if it means death. Human societies adopt cultural beliefs, strategies and rituals that become "the reason for our existance". My allegiance to "(Put what you like in here. - 'God' might do.)" is more important than my life. Many human groups have decided that cultural survival is more important than physical survival.

James K. Gailbraith in his classic book "The Great Crash of 1929" writes that "the bad distribution of income" where the top 5% of the population got 33% of all the income was at the top of a list of causes of the depression. In the last 30 years we've recreated that situation.

Economist Nouriel Roubini was one of the few economists with a high profile who correctly predicted the present depression. Roubini recommends that the government of the USA should nationalize all those US Banks that have balance sheets weakened by toxic assets. The directors and managers of those banks should be dismissed, and a form of bankruptcy should be pursued, which protects jobs and depositors funds. The bad debt should be isolated and the bank recapitalized. Over time the banks should be sold back into private hands. The problem with this idea is that in the USA, the concept of nationalization of the banks is unlikely to get political support. If this proves to be the obstacle I anticipate, it will be impossible to give the banks a clean bill of health and to restore confidence in the system. That will cause the depression to last much longer than it otherwise might.

GDP is not a satisfactory way to measure the progress of a society. An increase in economic activity does not spread to lift all boats.

Income Distribution
This is a difficult topic to deal with in short form. It's politically incorrect to talk about income redistribution especially in the USA. Today's orthodox position is to rely on the market to decide income distribution. Economists prefer not to look at wealth distribution in an economy. They argue that it's not the economist's responsibility, that it's the duty of governments to redistribute income. Capital gains are usually taxed at low levels. The richest 1% of the USA, get most of their income from capital gains. So favorable tax treatment to some extent gives them a free lunch. There are also many examples of tax rules that favour real estate and the financial sector, which help to stimulate prices and to increase the wealth of investors. The "market" always operates within a set of rules. The idea of a "free market" exists only in the mind of economists.

Debt Removal and Asset Revaluation
This depression will have the effect of redefining what is really of value. Debts that are uncollectable will be identified. Assets that are overvalued will remain unsold. People will decide when the price is right and when they once again have the confidence to spend money. Meanwhile, what are YOU investing in today? Your decision on how to use your money and your time and your assets depends on your own view about who you are, what role you should be playing and what the future will be. So immediately there are three things you might be changing that don't require the use of money. Who are you? Understand your own story, and learn to tell it to others. What should you be doing? What plans and ambitions do you have and how can you act NOW to bring that closer? Finally, what are the prospects for the future, and how well does your plan fit into that picture? We become what we are by the things we choose to do. The best advice I can offer is "choose to be useful" and I leave you to decide how you do that.